Some thoughts as I sit at home and ponder what to do other than watch events unfold on TV and play out on my computer screen. Maybe I’ll take Coco on another walk. Oh, it’s raining.
The Dow is still wildly unstable due to fear of the unknown. As long as the headlines are inundating us with catastrophic like news the markets will reflect that.
The stock market is always forward looking. It tries to price in the future. In times like this it will overreact, in both directions. As the news is so fluid and subject to change the market gyrations and volatility will continue to be extreme.
Bottoms occur at times of peak fear. Peak fear will be followed by less bad news which will be followed by higher prices which will be followed by better news which will be followed by even higher prices. I don’t know how to measure peak fear but it sure feels like we are in the middle of it.
What I do measure are the important levels that we need to watch. On Monday, the Dow broke below the very important ascending support from the bottom in 2009. Tuesday’s surge closed above this important level and today the flush down closed below. Closes below this level generally signal further selling.
As I last wrote last weekend, this failure will likely result in a cascade to 18,000, the next important level and I don’t know where this will end. I don’t know how bad it will get. This is a public health crisis where the government is shutting down private enterprise. This is new territory for me.
I guess the good news is that I have heard that China is back operating at much higher levels than a month ago. A family member, who has manufacturing business there, says they are back near 60%. The CEO of Fedex said today they are back to 90%. This indicates there will be an end to the crisis and when that end comes so will the recovery.
This crisis wasn’t caused by a bad economy. A bad economy is being caused by the reaction to the health crisis much of which is being mandated by the government.
Time will only tell but I think the reaction will prove out to be not wrong but overdone; a justified overreaction resulting in an oversold equity market. I really think we will come out of this with a stronger sense of the “can do” attitude that our parents and grandparents had after WWII and the pent up demand will help fuel our recovery.
I wish you all the best,