Published May 22, 2020
The stock market has rallied hard off the March 23rd bottom, surprising almost everyone in the strength and lift of the move. This rally has brought the Nasdaq 100 (QQQ) back to positive on the year, a stunning development given the dire economic situation. That positive year-to-date print for the Nasdaq reflects the seeming fact that Covid-19 has served to accelerate trends which benefit these top companies of the digital economy – e.g. Amazon, Facebook, Google. That the Russell 2000 small-cap index remains down almost -20% year-to-date, while the equally-weighted version of the S&P 500 is down -16%, is perhaps a better stock market gauge of the overall economy’s troubles.
If we are indeed in a broader bear market, as everyone thought back in March, then we should see stocks run out of upward steam and sellers re-engage. In the two most recent bear markets, the sellers have returned around the 15-20 month moving average. Here is the importance of the 15-month moving average during the 2000-2002 bear market (below). That average was supportive when the market was in an uptrend. It became a point for sellers to step forward during the downturn – see blue arrows.
And so it was again in 2008, where an early touch of that 15-month moving average spelled doom for stocks.
Where are we right now? Well, back at that 15-month moving average (see below). The S&P 500 has touched that reference line this month and may well ignore the history (and bear market calls) and march upward from here – as it did in the ‘false’ (or maybe prelim/practice) bear market of late 2018. With the 3000 level also looming overhead, we won’t be at all surprised to see the S&P 500 stall out for a while to see what the bears got. Either the bulls use that opportunity to gather strength for the next upward thrust, or the bears win the battle and the market drops back to reflect the broader economic realities, which we expect will be unsettling for at least the remainder of this year. However, we do think the election offers a wild card for markets. The White House and Senate has every incentive to throw the kitchen sink (and more) at trying to urge upward sloping economic data and tout a recovery underway. And the Fed will continue trying to talk markets up at the slightest negative twitch. It will be an interesting battle between bulls and bears in the weeks ahead with the winner perhaps setting the tone for the next several months.
Stocks surged higher Monday enthused by an encouraging coronavirus drug trial from Moderna (MRNA). A lift in oil prices underpinned a rally in energy shares. Together, these elements drove a +3.2% rally. The market held that rally through most of Tuesday’s trade until a report splashing some cold water on the Moderna drug story sent stocks downward in the final hour. The damage was relatively minimal though, with a -1% slip. Another positive coronavirus drug report, this time from Inovio (IVO) brought buyers in to support stocks Wednesday, resulting in another +1.7% rally while small-cap stocks surged by twice that figure. The weekly unemployment report coupled with renewed saber-rattling between the U.S. and China pushed stocks back Thursday. The -0.8% loss was, again, well less than the prior day’s rally, thus keeping the uptrend alive. Friday saw flat trade ahead of the Memorial Day holiday weekend.
Stocks recovered the prior week’s dip to keep the market’s 2-month rally intact. The S&P 500 (SPY) added +3.20% while the Nasdaq 100 (QQQ) pushed closer to an all-time high with its +2.86% rise. The small-cap Russell 2000 (IWM) more than offset the prior week’s -5% drop, this week posting a +7.84% gain.
Warm wishes and until next week.