COVID-19 Rally at “Critical Moment” Once Again

Treasury Secretary Steven Mnuchin

After a huge trading session on Monday, the market’s stumbling. Stocks opened lower and are treading water as of noon.

Moderna’s phase one vaccine trial, while successful, was by no means a “home run.” Yes, COVID-19 antibodies were found in study participants after being administered two doses of the vaccine, but that doesn’t imply it’s ready for deployment.

Nor that it even prevents coronavirus infections.

Investors are coming to grips that this morning, along with the potential for a second wave of COVID-19.

“With over 100 treatments and vaccines under development, a medical breakthrough, a more sophisticated test and trace model, and government support could drive more upside,” said Mark Haefele, chief investment officer at UBS Global Wealth Management.

“But our downside scenario cannot be ruled out. This could be triggered by a significant second wave of virus cases breaking out.”

Treasury Secretary Steven Mnuchin also caught the attention of investors today in a virtual Senate hearing, in which he said the federal government is “fully prepared to take losses” on coronavirus bailouts.

“We have worked closely with the Small Business Administration on the Paycheck Protection Program to ensure the processing of more than 4.2 million loans for over $530 billion to keep tens of millions of hardworking Americans on the payroll,” Mnuchin added.

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The treasury secretary’s comments come just one day after Fed Chairman Jerome Powell explained that the central bank still has plenty of stimulus to go around.

Much of which, apparently, won’t need to be paid back.

And if that new money stays in the economy, inflation is likely to rise. But instead of a “gold rush,” silver is surging instead.

The SPDR Gold Trust (NYSE: GLD) is up only 0.60% on the day while the iShares Silver Trust (NYSE: SLV) sits on a 2.5% midday gain. With gold looking overvalued relative to silver, analysts expect silver to continue climbing while gold posts much more moderate returns.

“Silver has made gained 14% so far this month, belying its negative seasonal price patterns,” wrote Orchid Research analysts this morning.

“In this context, a trading strategy consisting of being long SLV and short GLD could have an interesting risk-reward profile.”

But the real focus for bulls today is on whether the market can break through its late April/early May highs. At approximately 2,950, the S&P 500 finds itself “stuck.” Without another positive headline, the index might not be able to break through to new ground.

For investors that are still long on stocks, that’s a major reason to remain skeptical of a rally continuation. For bears, it’s a potential turning point that could result in a massive shorting opportunity.

In terms of dollars, cents, and share prices, analysts are cautioning optimistic investors to take a more realistic approach.

“It’s still very tough from a fundamental perspective for anyone to get incredibly bullish,” Yousef Abbasi, director of U.S. institutional equities at INTL FCStone, said.

“If we get more data and cities start to reopen […] then I would anticipate more confidence among investors.”

That data would certainly have to be convincing if the market’s going to punch higher. And after yesterday’s big session, it seems unlikely to happen this afternoon.

So, as usual, equities find themselves at another critical moment, hinging upon the next piece of breaking news. If fortune favors the bulls, stocks could keep on climbing.

But if nothing happens, or worse, COVID-19 cases start rising again, bears could reap huge rewards over the next few weeks.

All while the Fed continues pumping money into the market without any idea of how to retrieve it.

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