Week-In-Review: Long Overdue Pullback Hits Wall Street
The market opened higher last week but closed lower on very heavy volume after the number of Covid-19 cases jumped in several states around the country. For the past few weeks, I’ve repeatedly said the market is way overdue for a nice pullback and here it is. Ideally, you want to see a nice quiet light volume pullback into support that is shallow in both size (small % decline) and scope (short in duration). But, rarely, do we get textbook action on Wall Street. Last week’s pullback was ugly but that doesn’t mean the rally is over. It just means that, odds favor, we are in for some ugly action in the near term. A lot of it depends on what happens with the spike in new cases. If it is a short-lived temporary spike that would ideal but if it gets worse than that could negatively impact the economy (which is why the market fell last week). For now, the bulls remain in clear control as long as the major indices remain above their respective 50 DMA lines.
On Monday, the market ripped higher as investors continued to buy a lot of the beaten down areas that were hit hard during the covid shutdown. Legendary investor Stanley Druckenmiller who was somewhat bearish during the lows came out and said he was caught by surprise and humbled by the latest rally. He said he underestimated the power of the Fed’s easy money policies. In other news, the S&P 500 turned positive for 2020. On Tuesday, the market opened lower but buyers showed up in the tech-heavy Nasdaq composite and helped that index turn green. Many large tech stocks broke out of high bases and hit fresh record highs. Remember the Nasdaq was the first index to turn positive for 2020 and the first to hit a fresh record high. Clearly, it is leading the other popular indices as the big money continues to aggressively buy tech stocks. Stocks closed mixed on Wednesday after the Federal Reserve said it plans to leave rates near zero until 2022 and it expects GDP to grow 5% next year. Separately, the Nasdaq closed above 10,000 for the first time in history.
Thursday & Friday Action:
Stocks tanked on Thursday after fear spread regarding a second wave of the virus. Thus far, the number of cases has steadily declined but they jumped up recently as several key states reopened. As I have said several times in this report, the market was extremely overbought and way overdue to pullback. The market gapped up on Friday but spent most of the day selling off and closed in the lower half of the daily range after the CDC warned that the U.S. may reimplement strict coronavirus measures if cases go up ‘dramatically’.
Market Outlook: Flood The System With Liquidity
Global governments and global central banks stepped in with massive rate cuts and other “aid” packages to help “stimulate” both Main Street and Wall Street. So far, it is working as intended. As long as March’s lows hold, the market will likely move sideways to higher. On the other hand, if March’s lows are breached, then look out below. As always, keep your losses small and never argue with the tape.