The
Dow Jones futures are trading higher after the stock crash yesterday when the
Dow plunged more than 1800 points. Statistically speaking, whenever the Dow
experiences a drop of this magnitude, it is normal to experience some bounce
the next day. I suspect that the bounce is a dead cat bounce because the
sentiment is further dented by the latest comments from the chief economist of
the IMF who said that the world economy is growing much slower than anticipated
and that the scars of the coronavirus pandemic may linger for a long time to
come. In addition to this, we also had the UK’s GDP m/m data tank. The UK’s GDP
has now contracted by 20.4% during April.
Investors
are concerned about the likelihood of a so-called second wave of coronavirus in
the US and whether the US economy will come to a halt once again. The chances
of such a scenario repeating are minuscule because the US is much better
equipped to deal with the situation now as opposed to during the initial
outbreak when everything was unknown. The current spike in coronavirus cases in
the US comes from the not having the disease completely controlled before
states opening their economies and from Trump’s tweet about the killing of
George Floyd, triggering civil unrest in the US. The current sell-off appears
to be more of a correction for US stocks with a potential for returning to
their Covid-19 lows — when the stock market crashed— due to excessive exuberance.
However,
we should take note that investors were happy to buy the S&P 500 stocks
when they were selling at a premium, and today they have an opportunity to buy
the same stocks at a deep discount. These stocks still have the potential to
become even cheaper if the sell-off continues. The market breadth of the
S&P 500 still seems to suggest that the bull momentum has massively lost
its mojo.
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