For bulls, last week couldn’t have been much better.
COVID-19 sentiment shifted. Stocks soared. The Fed uncorked a record-setting stimulus plan.
OPEC+ even said it would cut its oil production by 10%.
This week, however, has gotten off to a far less auspicious start. Yes, OPEC+ is reducing its oil output by 9.7 million barrels per day – something the group of oil producers announced on Sunday – but the market is sinking.
Nearly every stock across the board (save for precious metals miners) is getting hammered.
The Dow, S&P, and Nasdaq Composite are down 2.60%, 2.45%, and 1.40%, respectively, as of midday. Market bellwether and Dow leader Caterpillar (NYSE: CAT) got scorched for an 8% plunge following a downgrade from Bank of America analysts.
Financial and real estate stocks aren’t faring much better. Both sectors have fallen over 3.5%.
And though it might seem like the rally’s drawing to a close (especially after this morning’s sharp drop), some analysts still believe the recovery could continue.
“The combination of unprecedented policy support and a flattening viral curve have dramatically reduced downside risk for the U.S. economy and financial markets and lifted the S&P 500 out of bear market territory,” said Goldman Sachs’ David Kostin.
“If the U.S. does not experience a second surge in infections after the economy reopens, the ‘do whatever it takes’ stance of policymakers means the equity market is unlikely to make new lows.”
Bruce Bittles, chief investment strategist at Baird, agrees with Kostin. He also argues that there’s technical evidence of a “rally re-boot” in the near future.
“The rally the past two weeks has produced two sessions with upside volume overwhelming downside volume by a ratio of 10-to-1 or more,” wrote Bittles in a note.
“The improved breadth does not eliminate the possibility of a retest, but it suggests the magnitude of any retest could be less damaging.”
Bittles is absolutely right. Given what’s happened over the last few weeks, momentum favors the bulls. And not just because of overwhelming upside volume, as impressive as it may be.
The S&P 500 broke key resistance last week at 2,641.39, transforming it into a level of support. If the index – along with the rest of the market – sells-off again tomorrow, a test of the late-March high (support) is likely, followed by a re-test of the of the April low.
Simply put, there are several barriers that bears will have to overcome on the way back down to the COVID-19 crash low.
For bulls, the sky’s the limit. Stocks appear likely to re-test multiple levels of support. Each one could serve as a potential “turning point” for investors.
So, is the rally finished?
For now, it doesn’t look like it.
That doesn’t mean the market would shrug-off a surprise coronavirus resurgence, though. Anything could happen in the coming weeks.
But at present, the evidence we have suggests that bulls are on the right side of things.
Even if stocks continue falling.
