Bad News is Good News for Stocks

Stocks are up this week as Friday is about to kick off. Yesterday, we learned than another 3+ million Americans filed for first time unemployment benefits. Today, we learned that the unemployment rate for April skyrocketed to 14.7% with 20,000,000 jobs being “lost” in April. Those numbers are unfathomably unthinkable.

I didn’t do the homework, but I certainly believe that almost every horrific economic report has been met with a big rally by the bulls. I have written about this for decades and repeat it on TV all the time. It’s not what the news actually is, but rather how stock react. In this environment, stocks are rallying on bad news. That is a positive no matter how much of a head scratcher that is.

Of interest this week has been the lack of energy by the bulls during the trading day. Almost all of the gains are occurring overnight, meaning that the market gaps up at the open and doesn’t add to those gains during the day. You can see what I am talking about in the chart below.

Look on the far right, the last three days. When you see a lot of green, that means stocks opened and rallied during the day. When you see a lot of red, it means stocks opened and went lower during the day. When there isn’t much color, stocks opened and close around the same level. That’s what we see on Tuesday and Thursday even though on the surface, stocks closed much higher.

I am sticking with my thesis that the stock market is in a trading range, at least for every major index except the NASDAQ 100. In my scenario, we won’t see a lot of green as the bulls are not firmly in control. However, it’s easy to assume that means a big decline is coming. I wouldn’t assume that either. In all likelihood, I think the market is looking at up a few percent to down high single digits.

I hope you are safe, healthy and sane!

Enjoy the weekend. 80 and sunny last weekend in CT. Rain, wind and yes, SNOW on Saturday. Spring in New England…

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Paul Schatz, President, Heritage Capital
Paul Schatz, President, Heritage Capital
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