Commenting on today’s equity market rally Gorilla Trades strategist Ken Berman said:
Following yesterday’s ’under-the-hood’ improvements, namely the lower number of new 52-week lows, today’s rally was the broadest since the beginning of the rout. It seems that the monster stimulus package could trigger a rally that will be more than just a ‘one-day-wonder’, but despite today’s encouraging breadth measures, it’s way too early to call a final bottom in stocks.
The major indices had one their strongest sessions ever, with the most-oversold sectors propelling the market higher, as investors put their faith in the historic $2.5 trillion stimulus bill that is likely to be approved by Congress later today. The Dow was up 2113, or 11.4%, to 20,705, the Nasdaq gained 557, or 8.1%, to 7,418, while the S&P 500 rose by 210, or 9.4%, to 2,447. Advancing issues outnumbered decliners by a more than 10-to-1 ratio on the NYSE, where volume was extremely high yet again.
Reasons behind equity market rally
The U.S. reported more than 10,000 new COVID-19 cases today, and since over a dozen U.S. states have issued stay-at-home orders, we can conclude that the U.S. and New York, in particular, is now the epicenter of the pandemic. The world’s second-most-populous country, India is now also under lockdown, for three weeks, together with the U.K., and even though the situation in Italy continues to slowly improve, most of Europe remains at standstill. The total number of cases topped 400,000 globally, so despite today’s shift in investor sentiment, the pandemic is far from being over.
Today’s European services PMIs, together with the Markit U.S. PMI were nothing short of disastrous, with several measures hitting record lows as Europe’s economy virtually shut down this month. Even though global governments are using all their tools to avoid a sustained economic crisis, a multi-month lockdown could easily start a vicious recessionary cycle. On a positive note, economic activity in China is already increasing, with several companies reporting positive supply-chain related developments, and that could support the global economy in the coming crucial months.
Sector analysis
The energy sector surged higher by a whopping 14% today, with financials, materials, industrials, and utilities also registering double-digit gains thanks to the furious short-covering equity market rally. The Dow rose by the most in almost 90 years, but on a cautionary note, the most bullish days of the industrial average all occurred during devastating bear markets. Credit markets also sent promising signals, with credit spreads narrowing and Treasury yields pushing higher, but the dollar held on to most of its recent gains, suggesting that bulls are not out of the woods yet.
Today’s Markit manufacturing PMI and Richmond Manufacturing Index were both much better-than-expected, most likely due to one-time technical factors, but tomorrow’s durable goods report could paint a more realistic picture of the sector. Analysts expect a 1% drop in headline orders, while core orders are forecast to decline by 0.4%. The weekly crude oil inventory data and the Housing Price Index will also be out after the bell, while the British Consumer Price Index (CPI) and a German sentiment measure will be in focus in pre-market trading.
What after the equity market rally
Technical Corner. While today’s equity market rally was among the strongest ever on Wall Street, the key trend indicators are still all bearish, due to the huge technical damage of the past few weeks. The major indices all remain well below their declining 50-day moving averages of 3,077 for the S&P 500, 8,838 for the Nasdaq, and 26,709 for the Dow. The benchmarks are also well below their 200-day moving averages of 8,406 for the Nasdaq, 3,035 for the S&P 500, and 27,011 for the Dow, with still the tech index being the strongest from a long-term perspective.
Gold surged higher for the second day in a row as commodity markets further calmed down and investors started to weigh the effects of the largest monetary intervention and fiscal stimulus in history. Industrial metals also gained ground thanks to the global rally, but while gold got close to hitting a seven-year high today, the more cyclical copper is trading just above its four-year low. Gold and gold-miners could remain strong in the coming months, as monetary conditions will likely remain easy for a long time even following the end of the COVID-19 crisis. Stay tuned!
