Weekly analysis: Bad day, good week, and what it means

Free Weekly Review and Lookahead: 

Friday’s price action was disappointing as a 40-point opening gain dissolved into a 20-point loss. But if you zoomed out to the weekly view, it was actually a good week and the market reclaimed 60-points that were lost the previous week.

Headlines continue obsessing over a “second wave” and Friday’s tumble was exacerbated Apple re-closing 11 of its stores in four states.

Hopes of a quick recovery could be thwarted by another government-imposed shutdown, but so far most states continue reopening despite the recent uptick in infections. At this point, there might not be the political will to force people to stay indoors indefinitely.

But even if the government doesn’t force us to stay indoors, people might be reluctant to resume their normal lives if every news broadcast starts with a body count. Fear-mongering and human nature are just as important to this recovery as government policy.

But when it comes to stock prices, investor sentiment is far more important than reality. As long as investors remain optimistic about the future and refuse to sell their favorite stocks at a discount, expect stock prices to remain stubbornly firm despite what the headlines keep shouting at us.

It has been a scary few months and stock owners who fear the Coronavirus and subsequent shutdowns have been given plenty of time to bail out. And not only that, these nervous sellers were replaced by confident dip-buyers who were buying despite the dire headlines. If these confident owners didn’t sell the “first wave”, what are the chances they will sell this “second wave”? When confident owners refuse to sell, headlines stop mattering.

As long as this market remains above 3k support, the larger Covid rebound remains alive and well. Even a dip and test of this level isn’t a reason to abandon ship. But if prices fall under this level and the selling accelerates, as nimble traders, it is our responsibility to get out and reassess. Until then, continue giving this rebound the benefit of doubt.

Next week is an important make-or-break week for the market. If the breakdown doesn’t happen next week, it isn’t going to happen. Keep your stops near 3k and let the market tell us what it wants to do next. Until the price action tells us otherwise, ignore all the cynicism and second-guessing.

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