Stock Market Rally Gains Strength But Not Ruling Out Re-Test

Willie Delwiche

Encouraging news on the fight against the coronavirus has helped fuel gains in stocks this week.

The S&P 500 Index INDEXSP: .INX has moved to its highest level in a month on the back of broadly-based rallies which saw two days (Monday and today) of upside volume outpacing downside volume by better than 9-to-1.

While the profound volatility of the last six weeks may mute this signal, it remains a welcome development at this juncture.

Additionally, today’s rally saw strength from small-cap and mid-cap stocks (which had been recent laggards), and leadership from the Energy sector (with hopes of an OPEC deal supporting Energy stocks as well as crude oil).

Overall, this provides further evidence that the downside momentum that emerged off of the February stock market peak has been broken and internally the stock market is beginning to heal.

While this does not preclude a meaningful re-test of the March lows, it does improve on the prospect that the most damaging elements of the bear market may be in the rearview mirror. While it is very encouraging that the downside momentum has been broken, we now need to see the market build on this with more evidence of broadening participation that more decisively turns momentum on the side of the bulls.

As we move deeper into the second quarter, it will be important that periods of weakness include reduced volume and fewer stocks hitting new 52-week lows.  

While the news on the virus front has been helpful, the economic situation remains a headwind for stocks. The economic impacts of the virus-related shutdown are only beginning to be realized.

Historic levels of monetary and fiscal stimulus may help cushion the blow, but the path for the economy is likely to be rocky for some time. Additional stimulus plans are already on the drawing board in Congress. Nevertheless, the uncertainty over time frame and what the economy might look like on the other end suggests that stock market volatility will remain high well into the summer months. At this point the weight of the evidence remains neutral as we are looking for confirmation of recent strength and more clarity on the macro outlook.

The Bottom line:  Improvements beneath the surface are very encouraging and could be suggesting that the most devastating part of the market decline may be behind us. We continue to look for longer-term trends to improve as opposed to offering short-term trading recommendations in a volatile market.

Twitter:  @WillieDelwiche

Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

Edited on April 9 at 10:14 am CST to add the word “market” to a sentence for clarification.