Stocks Stage Epic Rally As Panic Eases

Commenting on today’s trading in which major stock indices soared higher, Gorilla Trades strategist Ken Berman said

There has been a lot of skepticism on the Street regarding the sustainability of today’s bounce, but that’s exactly the kind of sentiment that usually accompanies a major bottom.  It’s definitely too early to declare that the coronavirus-correction is over, but today’s short-covering rally, together with the late-day pullback in Treasuries and Friday’s forced liquidations mean that we could see further short-term gains.

Coronavirus driven rally?

The major stock indices registered their largest one-day gains in recent memory, all but erasing last Thursday’s mini-crash as investors reevaluated the possible economic risks of the coronavirus outbreak. The Dow was up 1294, or 5.1%, to 26,703, the Nasdaq surged 15, or 4.5%, to 8,982, while the S&P 500 jumped by 136, or 4.6%, to 3,090. Advancing issues outnumbered decliners by a 2-to-1 ratio on the NYSE, where volume was well above average again.

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While last Thursday’s session broke several bearish records, today it was bulls’ turn to reach new daily extremes. The Dow rose by the most ever, at least as far as points are concerned, but its percentage gain of 5.1% was also the largest since the end of the financial crisis in 2009. Despite today’s lofty gains, the major stock indices are still well below their recent all-time highs, and since a lot of investors are carrying losses, a V-shaped bottom seems unlikely, meaning that volatility is likely here to stay in the coming weeks. 

Looking at the global coronavirus data alone, it’s hard to justify today’s rally, since the number of cases continues to surge higher. The Chinese trends have been encouraging, but as the situation in Italy and South Korea remains dire, the virus is far from being contained. The number of U.S. cases is also on the rise, but even though most experts agree that a pandemic is inevitable, investors reevaluated the likely the long-term economic effects of the virus thanks to the quick improvements in China.

What’s next for the major stock indices?

While long-dated Treasuries hit new all-time highs again today, the most-wanted global safe-haven assets sold off towards the end of the session. The intensifying rumors with regards to a looming central bank intervention were pushing yields lower in early trading, while also boosting equities, but the second half of the day saw a sharp rebound in yields. The fact that the defensive utilities and healthcare stocks were among the best-performing issues confirms that a lot of  value investors remain worried of a looming recession, even as financials, tech stocks, consumer goods, and industrials also shined.

Tomorrow’s session will be relatively low on key economic releases, compared to this week’s very busy schedule, but we will still have a couple of interesting data points to ponder. The Wards total vehicle sales number and the IDB/TIPP economic optimism number could both provide information on the outbreak’s effect on consumer sentiment. The pre-market session will be highlighted by the Eurozone Flash CPI estimate, which could lead to wild moves in currencies, which went haywire last week amid the historic selloff in equities. Stay tuned!