An Oversold Wall Street Rallies Despite Bad News: 5 Top Picks

On Mar 26, news of two extremely unfortunate scenarios surfaced. First, the Department of Labor reported that initial jobless claims by Americans jumped to a historic high 3.28 million for the week ended Mar 21, on account of the coronavirus-induced lockdown. Second, the number of people affected by the deadly virus in the United States surpassed China and Italy with the death toll crossing 1,000.

Yet, at the end of yesterday's trading session, the three major stock indexes — the Dow, the S&P 500 and the Nasdaq Composite — rallied 6.4%, 6.2% and 5.6%, respectively. Notably, the Dow and the S&P 500 posted three consecutive days of gains for the first time since Feb 6 and 12, respectively.

In fact, in the last three days, the Dow surged 21.3% — best three-day stretch since 1931. The S&P 500 climbed 17.6%, reflecting its best three-day streak since 1933. Meanwhile, the Nasdaq Composite advanced 13.7% in the last three days.  

Bad News Generates Rally in a Highly Oversold Market

The market has been so oversold in the past five weeks that even bad news, except for the worst-case scenario, will not deter market participants from buying good stocks at an attractive valuation. This is because the bad news is already factored in or priced in market valuation. 3.28 million of jobless claims were better compared with more than 4 million expected by some industry researchers.

In fact, in the near future, we may witness several bad news and economic data. A large number of analysts have already predicted that the second-quarter U.S. GDP will decline by more than 20%. We may see several weak estimates for other metrics also. However, the stock market recovery will not cease unless the actual data represents the worst-case scenario.

This is primarily because of extremely low stock market valuation owing to overselling, mostly panic selling due to the unprecedented non-financial hazard to global financial markets. The Dow, the S&P 500 and the Nasdaq Composite are still down 23.7%, 22.3% and 20.7%, respectively,  from their all-time highs recorded in last month, even after the historic rally of last three days.

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