The Stock Market Is Bouncing Back. That Probably Won't Matter. - Barron's

Photograph by Bryan R. Smith / AFP via Getty Images

9:49 a.m. U.S. stocks opened up more than 5% Friday morning before paring back some of their gains. The Dow Jones Industrial Average was up more than 1,200 points at the open, a gain that was down to 785 —a nice boost, but only a chunk of the 2,352 point drop from Thursday. Indeed, the Dow’s 9.99% drop on Thursday was its largest one-day percentage decline since Black Monday.

Tom Essaye, founder of Sevens Report Research, thinks most of Friday morning’s rally can be attributed to a “typical oversold bounce,” though he does note there are hopes global governments will unveil economic stimulus plans over the weekend. That began to take form as Germany announced such a fiscal stimulus package. And on a more positive note, Thursday’s drop could be a sign of investor capitulation, according to Essaye.

“Encouragingly, although counterintuitively, yesterday’s collapse to new lows in the afternoon was consistent with investor capitulation, which often marks the end of these types of volatility bouts,” he wrote in a note to clients. “In this case, the price action in the coming days will be extremely important, and specifically we are looking for a ‘lower low’ in the S&P 500 followed by a close above yesterday’s high of 2,661.

Still, the fact that the market closed on the low signals more volatility to come, according to Jim Stack, founder of InvesTech Research.

“History indicates it would be a mistake to sell additional holdings into this waterfall decline—at least at this me and without any solid warning flags of recession,” he wrote on Friday.

Monetary and planned fiscal stimulus didn’t help much this week, which leads Stack to question how much of the selling panic is more attributable to the fears of the unknown versus the reality of a protracted long-term economic impact.

Though Stack thinks Thursday’s selling could carry over into tomorrow, he suggests a wait and see approach. “At this point, overreacting is perhaps a greater risk than objectively keeping one’s feet on the ground,” he added.

The Dow Jones Industrial Average was up 3.6% early Friday morning. The S&P 500 index was up 3.8%. The Nasdaq Composite index was up 3.6%.

Write to Connor Smith at connor.smith@barrons.com

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