April 5, 2020

News that the virus-related death rate in New York had peaked sent the Nasdaq (NQ) future higher in Sunday evening trading. It was last up 3.79%. Many have been watching for just this sort of headline to indicate the worst is behind us.

Technically, however, the negative outweighed the positive last week. A plus was the O'Neil follow-through day (FTD) in the S&P 500 on Thursday. While the 2.28% gain on higher trade was welcomed, in this historically volatile market it represented less than half of average daily volatility. Further, Friday saw a major distribution day in the index.

A study of FTDs since 1880 reveals a 95% failure rate when a distribution day occurs 1-2 days after an FTD. This research, then, suggests the S&P will eventually take out its low of nine trading days ago.

For its part, the Nasdaq fell below its 9 ema last week as a foray above the 20 ema proved short-lived. Note how the volatility and volume have both slackened recently, a plus.

As we have seen in our look at historical precedents in the last two reports, it is likely that the averages spend a period of time backing and filling once the final bottom is reached. This process is necessary as the market seeks a supply-demand equilibrium.

At its Mar. 23 low, the Nasdaq had corrected 32.6%. The view here is that the barometer would be getting off scot-free if this is the extent of the damage for this bear market caused by a once-a-century shock. This is based on the historical precedent of bear markets related to severe recessions (e.g. '73-'74, '07-'09), when the losses were substantially greater.

'73-'74: Nasdaq -60%
'00-'02: Nasdaq -78%
'07-'09: Nasdaq -56%

So down 32.6% would be a best-case scenario. If that ends up being the case, then the market will have lived up to its reputation of bottoming when the news is at its bleakest, which was the case on Mar. 23.

Otherwise, beneath the surface of the averages, the action of the speculative growth-stock glamours was particularly revealing late last week. Specifically, the wheat was separated from the chaff.

In sum, while the technicals deteriorated this past week, the market received a jolt of good news over the weekend related to New York's decline in virus-related deaths. This was expected to produce a rally, which is occurring this evening in the NQ future. Let's approach the coming week with no opinions and let the market tell its own story.

For the rest of this report, please refer to Part II which consists of a video and for which you will receive a notification email.

Q&A

Q: I have traded some Chinese stocks with success (BABA for example), and of course the market is huge and some have very strong growth numbers.  But we see LK take a dive, GSX, and others. What are your thoughts on adjusting strategy for Chinese stocks, if one concludes their numbers must be taken with a large dose of salt?

A: Thank you for checking in. I have always felt that the way to adjust for the higher risk of Chinese stocks is to reduce risk via a smaller position size than normal. I hope this answers your question.

Kevin Marder

For intraday ideas and analysis: https://twitter.com/mardermarket

All stock charts created using MarketSmith. ©2020 MarketSmith, Incorporated. All other charts created using TradeStation. ©2001-2020 TradeStation Technologies. All rights reserved.

The views contained herein represent those of Marder Investment Advisors Corp. At the time of this writing, of the stocks mentioned in this report, Marder Investment Advisors Corp., Kevin Marder, or an affiliate thereof held no positions, though positions are subject to change at any time and without notice. Estimate data provided by FactSet. Expected earnings release dates provided by EarningsWhispers.