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Why The Market’s Recent Rally May Mark The ‘Frustration’ Phase Of The Recovery

Until the market is able to make a more meaningful move higher, investors should be prepared for more volatility ahead.

Between February 19 and March 23, the S&P 500 plummeted -34% in what was one of the fastest falls into a bear market on record as the coronavirus sparked an unprecedented economic shutdown across the U.S.

Since that bottom, the index has rallied 32% and is now down just -13% from its February 19 high as new coronavirus cases slow, states reopen their economies, and positive news on treatments and vaccine development spur the market higher. 

But while the run-up has been impressive, it may be a bit premature to turn bullish.

That’s according to Canaccord Genuity’s Tony Dwyer who says stocks have yet to break out of what he calls the “frustration” stage of a three stage process: panic, relief, then frustration.

Source: TradingView.

“Once you crash, you go into a panic phase,” Dwyer said. “You get this incredible decline, this panic. The market gets so historically oversold that it sets itself up for a counter trend rally, a relief rally.”

In the frustration phase that the market is in now, Dwyer says stocks often fluctuate between two extremes: crashing or going straight up. 

That kind of volatility has been apparent over the last week with the S&P 500 jumping 3% from Friday to Monday, then dropping -1% Tuesday, then rising 1.7% on Wednesday, only to fall -0.8% on Thursday. Up, down, up, down…

“It’s one of those frustrating times where you’re not sure exactly what to do in the split between angst and Fed optimism,” Dwyer said.

But it’s not all bad news. Dwyer says he sees a more solid trend forming.

“You’re finally getting a movement into economically sensitive areas rather than a COVID-19 trade,” Dwyer said. “However, you want to see something more than a day or two.”

What Dwyer is watching for now is the action in economically sensitive sectors like banks, industrials, and consumer discretionary. He also believes more positive news on the coronavirus vaccine front could prove to be a catalyst for a more meaningful move higher and out of the frustration phase.

“We are market neutral,” Dwyer said. “We’ve been waiting for this kind of market rotation to happen. We want to see a little bit more of a trend. If we continue to see leadership coming out of these economic sectors as well as the credit markets, it would suggest some more tactical upside.”

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