Dead Cat Bounce In The Market Slump?
Declan Fallon | Mar 03, 2020 12:20AM ET
These big reaction moves always seem to happen when I'm afk. Anyway, markets are attempting to price what impact the Coronoavirus will have in both the short term and long term, but after 10% declines we now have the dead cat bounce effect. I don't expect the bounce to last, with a retest of recent lows likely, but this test could evolve into a slow decline—with buyers reluctant to step in until the impact of world events can be priced in, which is easily a few months away and potentially longer.
If you are looking for an exit, then the next couple of days could be critical. It's hard to see indices make it back to multiyear highs without a containment in the Coronavirus outbreak, so yesterday's bounce seems artificial.
The Dow Jones Index added 5% as it accelerates toward its 200-day MA on net bearish technicals. Relative performance remains poor (vs the NASDAQ 100) and until there is a relative advantage it's hard to see it sustaining a strong run higher.
The S&P was able to go one further with a bullish cross of its 200-day MA. And this added strength allows it to enjoy a relative advantage against Small Caps; this will help it attract buyers as investors move towards a flight to safety
The NASDAQ was able to stage a comeback from its 200-day MA. This is a key support tool for the index and offers a solid technical basis for a bounce. The past two days of gains are enough to maintain an accumulation trend in On-Balance-Volume, and this could prove important in the coming days as traders look for a good place to park their money.
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The Russell 2000 (via iShares Russell 2000 ETF (NYSE:IWM)) has managed to deliver a rally from the cluster of swing lows created in 2019. Should this rally fail, then an undercut of the 200-day MA and a move back to the 2018 swing low would be next on the menu. Technicals are all net negative, but if relative performance can make inroads towards a new 'buy' signal, then the index will have the foundation to attract investment.
Presidential actions have little to do with market rallies and gains and this loss is no exception. As the Coronavirus expands its foothold it will continue to generate disruption to manufacturing, supply chains and food shortages—not to mention a widescale death of consumers.
It's still too early to assess the full effect of this virus, but from a technical view losses like this are traditionally good opportunities to be buying/accumulating and staying active in the market. I would be looking for an A-B-C wave correction (for which we have probably seen 'A' and are now on the 'B' bounce) with another 10% trim likely from where the high of 'B' ends. Should we get the 'C' then don't be hesitant getting aggressive with the buying. These discounts rarely last long and impacts from the Coronavirus are likely to be brief.
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