Week Ahead: Wild Swings Renew As Conviction Flips From QE Relief To Virus Fear

As another earnings season approaches, investors find themselves with no clue as to how significantly COVID-19 has already pressured domestic as well as global growth. Ahead of the Good Friday and Easter holidays, the U.S. market abruptly shifted out of a bear market and shockingly, seems to have started a new bull run as the S&P 500, Dow Jones, NASDAQ and Russell 2000 each closed higher on Thursday to finish the shortened trading week.

In previous posts, both daily and weekly, we've warned of savage whipsawing. Nonetheless, we didn’t expect indices to fluctuate this wildly.

Still, though stocks came back from the dead last week—driven by the Fed pledging additional, $2.3-billion in stimulus in the face of another week of overwhelming jobless numbers because of coronavirus lockdowns in the U.S., to be used as loans for small- and mid-sized businesses ravaged by the pandemic, and reports of a possible outbreak plateau as the number of cases slowed in Italy and Spain, even while hospitalizations in New York ticked lower—the picture has shifted once again.

Since Thursday’s close, the U.S. has officially earned the dubious honor of now being the world’s pandemic hotspot, with 529,951 confirmed cases as of the time of writing. Globally the case count has risen to 1,777,666 with 108,867 deaths.

Will this upend the rally when markets open on Monday? According to the Wall Street Journal , the outlook is unclear. The “Fed has firepower to do more after [its] $2.3 trillion aid blitz,” but going all in “poses new risks to its independence.” Plus, with Fed stimulus already propping up the markets, it also encourages irresponsible investing that could potentially create another bubble.

While investors weigh whether unprecedented, unlimited QE can offset the virus’s impact on the economy, “unemployment claims keep pouring in as states struggle to cope.” Including last week's massive initial claims applications, an overwhelming 16.8 million workers have filed new claims in the past three weeks, bringing the total of newly jobless to 1 in 10 American workers, in the last three weeks.

Still, despite what can only be described as catastrophic numbers for the country's economy, the S&P 500 jumped on Thursday, rising for the third day out of four to notch a 12% gain for the week. It was the benchmark index's best week in 46 years. The push higher added $4 trillion in value to the index's stocks, just a few weeks after losses had sliced off $10 trillion of that value. Perhaps more surprising , “stock market bulls hope that the S&P 500 will rally further even as corporate earnings crater."

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Does that even make sense? We hardly think so. But we don’t control the market, which, at its essence, is nothing more than a glorified voting machine. The more money investors vote to put into it, the higher up it will go—whether the gains are rational or not. In our opinion the elevated valuations simply do not justify the risk, but we've been wrong before.

Indeed, we've been bearish on equities since March 3 and have restated that position in a variety of posts since then. Just last week, on April 5, we reiterated our outlook for another selloff.

Some readers, however, were confused when we reported, on April 7, that the S&P 500 had completed an uptrend. Some commentors asked what happened to the earlier bearish flag mentioned in last Sunday's post? Two words: it failed.

The market's activity never provided the presumed downside breakout; rather it blew out the pattern, breaking instead to the topside. While initially it looked to be forming a rising flag, the patterned morphed into a V-bottom, marked by the thick black lines.