Stock Market Selloff Not Over

Early this week, there were some hopes that the stock market may have bottomed last Friday. There were certainly some encouraging signs like a parabolic Vix, elevated put/call ratio, excessive short-term bearish sentiment, and oversold technical readings. Often in the past, these circumstances have occurred when stocks bottomed and bounced back.

On top of these market dynamics, there was some other positive developments including falling interest rates, increasing signs that the Federal Reserve was going to cut rates and momentum for former Vice President Joe Biden's candidacy heading into Super Tuesday. These positive fundamental factors materialized, but it wasn't enough to derail negative momentum in stocks.

Additionally, economic data in terms of employment and services came in much higher than expectations which indicates the economy was on sound footing prior to the coronavirus outbreak. The Fed did its emergency rate cut, and fed futures markets are pricing in between 50 and 75 basis points of cuts at the March meeting.

Biden followed up on his South Carolina victory by outperforming even the most optimistic projections and is now a decisive frontrunner in the race. Prior to Super Tuesday, Senator Bernie Sanders was a 2:1 favorite to secure the nomination. Currently, Biden is a 4:1 favorite, and it's conceivable that he can end the race with a decisive victory in the upcoming Michigan primary. A Biden-Trump matchup would pit two market-friendly candidates and at least remove one "tail risk".

Stock Market Gyrations

Last Friday, the S&P 500 (NYSE: SPY) bottomed around 2,850. It climbed as high as 3,135, following the Fed's rate cut and Biden's surprise triumph on Super Tuesday. However, stocks were sold into this strength, and the bulk of gains were given up. The primary factor is that the coronavirus continues to spread, and there's a high degree of uncertainty about its total impact.

Further, the federal government seems to be behind the ball. China was able to stop the virus' spread by basically shutting down the country for a month. In the US, some localities and businesses are taking these types of extreme steps. Another shortcoming is that the government doesn't seem ready to prepare any type of serious package to deal with the loss of economic activity which could have damaging second and third-order effects, especially for low-income workers.

Given these factors, stocks are likely to keep falling farther and break below Friday's lows.