The S&P 500 (NYSE: SPY) plummeted 35% from late-February to late-March. Since then it bottomed around 2,200 and rallied more than 20% over the next six trading sessions to just above 2,600. There was some hope that this meant a new bull market was starting. However, this seems unlikely for a variety of reasons.
Weak Breadth
One component of a durable market rally is widespread participation across many sectors. This is not happening so far which increases the odds that this is an oversold bounce rather than a trending rally. Oversold bounces are typical in bear markets and work off excessive bearish sentiment. They can also punish greedy short-sellers and suck in impatient bulls. They tend to last between a couple of weeks to a couple of months.
The weakness in market breadth is most apparent when looking at the weak performance of small-cap stocks in comparison to large-cap stocks. While the S&P 500 is 26.7% lower from its top, the Russell 2000 (NYSE: IWM) is nearly 38% lower. Since the March 23 low, the S&P 500 is 13% higher in comparison to the Russell 2000's 9% gain.
Small-cap stocks are more leveraged to economic conditions. They also have weaker balance sheets. So far, the Fed's stimulus and fiscal programs will have more benefits for larger corporations than smaller companies. One of the consequences of the Great Recession was more income inequality due to the inflation of asset prices as the real economy, labor markets, and wage growth lagged.
It seems likely that the coronavirus outbreak, shutdowns, and subsequent recession or depression could lead to more inequality among corporations. This is already evident with the shutdown as small businesses are shuttered while many larger companies like Amazon (Nasdaq: AMZN), Walmart (NYSE: WMT), or Target (NYSE: TGT) are thriving and eating up market share and growing bigger.
Short-Term Bullish but Intermediate-Term Bearish
Traders should treat this as a bear market. Strategies and allocations that worked over the previous ten years such as buying breakouts or stocks with high growth and high margins will not succeed. They should use temporary strength to build short positions or make quick trades.
Another problematic feature of the current market is the high-level of retail bullishness. Retail investors have used the weakness to put money to work. Historically, bear markets haven't ended until retail investors were liquidating their positions.