Stocks

Stocks Surge On Hope For Stimulus; Is The Bottom In?

Display of stock quotes
Credit: zhu difeng / stock.adobe.com

The stock market is still looking for a bottom, which many experts say doesn't occur in one day. Bottoming out is process, some insist. And, I agree. But that didn’t stop value-hungry investors from piling in to stocks on Tuesday as the stimulus package deal gets closer.

On Tuesday The Dow Jones Industrial Average surged more than 11% to produce its best one-day gain in 87 years. Think about it, one day after the Dow logged a historic selloff, the next day it delivers a historic bounce. That should tell you what kind of volatility we’re dealing with. On Tuesday the stock market (every sector) was in the green, driven by optimism that the senate will shake hands on a stimulus bill that will give the U.S. economy the lifeline it needs to avert the damage caused by the coronavirus.

The Blue Chip index closed 2,112.98 points higher, led by 20% rise in Boeing (BA) and an 18% gain in McDonald’s (MCD). Disney (DIS), which has gotten punished since closing its parks, rose more than 14%, while Home Depot (HD) and IBM (IBM) added 13.75% and 11.3%, respectively. Investors are betting that the stimulus bill will help offset the lost revenue and profits companies are certain to suffer from due to the numerous stay-at-home orders and, in some cases, complete shutdowns that’s designed to stop its spread.

Even so, some caution is still warranted. The fact that the Dow logged its biggest one-day percentage gain since 1933 suggests investors are already calling the bottom. The Nasdaq Composite surged 8% to 7,417.86, gaining its best day since March 13. The S&P 500 was no slouch, rallying more than 9% to close at 2,447.33 for its best day in almost twelve years. Even the energy sector joined the party, lead by the almost 13% gain in Exxon Mobil (XOM) and Chevron (CVX) which surged 22%, sending the Energy Select Sector SPDR Fund ETF (XLE) soaring 16%.

I’ve begun to hear rumblings that we are near a bottom. And that may very well be true. But we have seen these head-fakes many times before. The market was expecting a deal last Friday, this past weekend, and on Monday. Now the deal that was suppose to happen Tuesday didn't materialize. And while negotiations are seemingly ongoing, diving in head first into the market seems a bit too bullish. I know that might be shocking coming from me, the unabashed optimist.

Look - I'm certain the senate will agree to a deal. The question is, does it change the outlook that was assumed by Monday’s decline? Here’s what we know: As the market plunged into this coronavirus-induced bear market, falling 35% in a matter of weeks, there were certainly indiscriminate selling. In a rush to raise cash, great companies with strong cash flows — like some of the ones mentioned above — got whacked along with the poorly-run/highly leveraged names.

Tuesday the table flipped towards what I call indiscriminate buying. How else do you explain the 42% jump in Norwegian Cruise Line’s (NCLH) stock on Tuesday alone. Norwegian was the biggest gain on Tuesday for the S&P 500. The cruise line has been hit with tons of cancellations due to the coronavirus. It will be a while before it is smooth sailing for the company. I’m not singling out Norwegian. There were other examples out there.

On Monday I advised not to rush in, giving you three ways to protect yourself in a bear market. There was nothing gradual about Norwegian’s stock gains. Let that be a reminder.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Richard Saintvilus

After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.

Read Richard's Bio