3 Scenarios for the Stock Market in Q2

After big declines in stocks, it pays to hear what the masses are thinking because they are usually wrong collectively. At the last major bottom in December 2018, most people were looking for a rally and a revisiting of the Christmas low. I was in that camp. As we know, stocks rocketed higher and never looked back all last year. There were plenty of confirmations in January that another decline was no longer in the cards.

Today, we have a stock market trying to repair itself from a 30%+ decline. In history, there has never been a “V” shaped bottom with this much carnage. However, there has also never been a case in history with the Fed, Treasury and Congress creating an unlimited tsunami of liquidity to combat an event.

Until this week, I hadn’t heard anyone talking about the market snapping right back, but that has changed. I think the real tell will be if stocks do see another bout of weakness sooner than later. Below are the three possible scenarios for stocks.

1 – March 23rd was THE low and stocks are not going back down near there again. It’s another rare “V” bottom like December 2018.

2 – This is a bear market rally that will suck people in over a few days before rolling over and through the March 23rd low on the way to sub-2000 on the S&P 500.

3 – This is a relief rally that will end sooner than later and rollover to revisit the March 23rd bottom, plus or minus a few percent over the coming weeks.

If you would like to be notified by email when a new post is made here, please sign up HERE

Bulls Huge Surge into the Zone

The bulls came back from the weekend in much better health with the intent of damaging the bears. Lots of hope on the Covid numbers out of NYC as well as the hope for the economy to reopen sooner than later. While I do love optimism, I don’t see the economy restarting so quickly. I think way too many confuse the curve flattening or peaking with things get dramatically better. But definitely count me in for hope!

Monday’s rally was a monster with the expected internals to match. The most beaten down bounced the hardest like mid and small cap stocks. The credit markets continue to fight back and function much better after the Fed’s historic tsunami of liquidity.

Let’s revisit the zones I have been discussing where the first bounce could or should lead. Below is the Dow Industrials and you can see that the rally is right in the middle of the zone and closed above the high from 7 days ago which means there should be some follow up on Tuesday or Wednesday.

The S&P 500 is below and it’s essentially the same. The index just made it into the zone as well as closing above the important high set 7 days ago. Follow through buying could take the S&P to the mid 2700s and possibly 2800 in a best case ahead of Good Friday.

If you would like to be notified by email when a new post is made here, please sign up HERE

Bulls Looking to Open New Week with a Bang

Without jinxing anything, the weekend seemed on the “quieter” side regarding the news. While it remains bad, things didn’t accelerate to the downside so that’s something. After an abysmal jobs report on Friday, stocks were not down all that much after finishing with a flurry. As I always say, it’s not what the news actually is, but rather how stocks react. A 30%+ decline prices in a lot of the bad news we are seeing and what’s in store down the road.

Futures are soaring in the pre-market. That’s likely to hold into the open and my sense is that it will be a big up day. Lots of people will feel relief. I may have to umute the TV and see if we hear talk of “THE” bottom being in and no more selling. That would run counter to what was said late last week with so many forecasting much lower prices, including Guggenheim.

In the very short-term, there are two price levels to watch in the major indices. Both are depicted by the blue horizontal lines below. Closing above both of those would do a lot to confirm a return to more normal price behavior and less of the crazy swings.

Assuming we do see the big rally indicated, this would be an opportune time to see which sectors lead and lag. I would imagine the small and mid cap stocks lead, but that’s only because they have been decimated. Let’s also see how high yield bonds behave as they have quietly been performing better than the stock market in the face of widespread defaults.

While I don’t think the markets are out of the woods, each day and week are getting us closer to more constructive action. Markets need time to heal their deep wounds before they begin the assault on Dow 30,000 in 2021.

If you would like to be notified by email when a new post is made here, please sign up HERE

Unfathomable Job Losses

On Thursday, the government reported that 6 million people filed for first time unemployment benefits. The states are finally catching up and able to process the overwhelming numbers. On Friday, the February jobs report saw 700,000 jobs lost with the unemployment rate over 4%. This is the first negative report of jobs since late 2010. I and everyone expect subsequent reports to be equally bad or worse.

For decades, I have said that regarding investing, it’s not what the news actually is, but rather, how the markets react to see what is priced in and what is not. Losing 6 million jobs is an unthinkable number. However, stocks responded by rallying sharply. Yes, they were down the day before and a little oversold and oil did jump on Trump’s well-timed tweet about a production cut between Saudi and Russia. I do not expect the same result on Friday.

Thankfully, volatility has fallen sharply of late and even though the bull market hasn’t returned, market moves are becoming more manageable and I am not seeing waves of forced selling at any price. This is all part of a process that will take time.

I finished the research on major stock market bottoms since 1987 and I am thinking about doing a video on it later today. After that, I can post it here.

Stay safe and healthy!

If you would like to be notified by email when a new post is made here, please sign up HERE

First Bounce Fails. Bears in Control

In the last two posts I wrote about what I saw as the bulls having the ball early in the week with the bears taking over as the week proceeded. After a day and a half run by the bulls, they quickly gave up by lunch on Tuesday, allowing the bears to enjoy yet another 90% down day on Wednesday where more than 90% of the volume traded was in stocks going down on the day. As you know that is an extreme number showing widespread selling. The bulls need at least one 90% up day or two 80% up days to stem the tide.

Last week, I posted charts showing a zone where I thought stocks could bounce in to. They barely made it before rolling over indicating the bears are not done with their show of strength. The Dow Industrials is below. The S&P 500 is weaker.

While there isn’t much more to glean from Wednesday’s nasty down day, the bulls will need to put up a little stand on Thursday to prevent another rout ahead of the weekend. Although stocks are not done going down, I remain in the camp that said we have already seen the internal on momentum low on the 23rd. If you recall, that’s the point of maximum downside acceleration where the most damage ends, regardless of whether the major indices eventually trade below that level.

Last week, I promised to offer some analogs to previous major market bottoms and as I sat down to write about it, more ideas popped into my mind. My office manager, Renee, is going to do some of the grunt work this week and I hope to share the results by the weekend.

If you would like to be notified by email when a new post is made here, please sign up HERE

End of Month & Quarter. Bears Getting the Ball

To say this has been a long month would be the classic understatement! Four weeks ago, I was all packed and ready to head to Cabo San Lucas for a long weekend before going on to LA for work. Cabo has been on my bucket list since I used to watch The Love Boat on Saturday nights in the 1970s followed by Fantasy Island. I know. Kinda pathetic, but with only 13 channels, there wasn’t much on.

From high to low, the major indices lost between 28% and 42%. It was much worse in the sectors with energy and related groups down more than 60% and some topping 70%. As you would imagine, the less impacted sectors like healthcare and staples lost under 30%. It was a very difficult months for most investors and one people would like to forget. As we know from history, they won’t easily forget this just like they didn’t erase the 1987 crash, 1990 and 1998 events, Dotcom burst, 9-11 and the great financial crisis so quickly.

And that lack of amnesia will be precisely what hurts investors as the crisis abates and the markets and economy recover. Many investors who have not reduced their risk tolerance already will likely do so sooner than later when stocks rebound a bit more. And judging by history, they will likely stay more conservative for years to come, missing out on what I believe will be huge gains.

For almost 5 years, I have written about Dow 30,000 when the masses were mostly warning of impending doom. It wasn’t until late 2019 and early 2020 when they threw in the towel and went all in. I now think Dow 30,000 will be too conservative for the next bull market. While our model hasn’t come up with anything beyond 30K yet, when I plug in make believe future numbers, there are scenarios to see 40,000 and even 50,000 in the 2020s. I know. I am putting the cart way, way before the horse when we may not have even seen the final low yet. Stay tuned.

With month and quarter end here, there is a seasonal tailwind for stocks the rest of the week. However, during volatile times, seasonal tendencies usually get run over. Yesterday, I wrote that the bulls have the ball for the first part of this week with risk increasing as the week went on. I still think that holds true. It would be a huge victory for the bulls to win the battle over the last three days of the week, but I don’t see that as the likely outcome.

 

If you would like to be notified by email when a new post is made here, please sign up HERE

Setting Up for the New Week

Last week was certainly one for the ages. It had everything a bull and bear would love and hate. March 23rd will go down as the internal or momentum low for this bear market, if that’s even the right term anymore. By internal low, I am referring to the bottom where the biggest swath of damage was done, where there was the most downside acceleration and panic. If there are subsequent lows in the coming weeks and months, I will go out on a limb and say there will be more stocks resisting the decline than we recently saw and we will actually see widespread differentiation.

From the March 23rd low, stocks rocketed higher by 13-21% in the major indices, causing some to conclude a new bull market has started. As you know, I have never been one to hang on the arbitrary metric of 20% in either direction as the line in the sand. In 2011 and 2018, we saw 19.90% declines that people refer to as bull market corrections. However, somehow adding 0.10% would make them into bear markets? That doesn’t make sense.

Anyway, the bulls made an important stand last week and the tiniest of green shoots has now grown and grown. I will add them to my list of things to publish here this week. It’s a lot of charts. The model for the week will be continued volatility with the edge to the bulls at least for the first two days. It becomes less likely as the week wears on. We shouldn’t rule out a small range setting up either.

I think it’s important to watch the Volatility Index or VIX to see if it can break lower, signaling less stress in the stock market. I also want to see if long-term treasury bonds can finally stop going up each and every day. Finally, the big winner during Friday’s rout was the high yield bond market. It was supposed to decline as it has been behaving like the stock market. However, it finished higher and is showing the earliest of early attempts at leadership. That’s another tiny green shoot.

Remember, taken in a vacuum, any little green shoot can be easily dismissed. However, when you add them up, the tiniest of green shoots ends up being something significant. The news regarding the virus, especially in New York and other big cities, is going to get worse, perhaps much worse. Watching market reaction will say a lot about where stocks are heading. This bears repeating; it’s not so much what the actual news is, but how stocks react. Bear markets do not end with good news, just like bull markets do not end with bad news. For those waiting for the “all clear” sign to invest, my sense is that it won’t come until stocks have recovered a significant portion of what they lost.

If you would like to be notified by email when a new post is made here, please sign up HERE

This is NOT 1931 But Still Too Many Looking for Easier Markets

The bull are back in town, at least from Tuesday through Thursday they were. If you even casually follow the markets, you have probably heard that it has been the biggest rally since 1931 after the sharpest decline in the least amount of days since, well, 1931. 1931 was in the heat of Great Depression part I (GDI) which is not an enviable analog. From 1929 to 1932, stocks lost 89% before rallying more than 400% into 1937 when Great Depression part II (GDII) began because the governmental powers that be started taking victory laps, restricting money and tightening credit.

The answer is NO.

I do not believe the current situation even remotely resembles GDI or GDII. People put up 5% and borrowed 95% in the 1920s. The government tried raising taxes during an economic crisis and then putting on protectionist measures. Global governments defaulted on their debt. Because of severe weather, crops were wiped out which led to food shortages. World War II obviously changed all that and the economy was instantly recharged. Some conspiracy theorists argue that FDR knew Pearl Harbor was going to be attacked, but he thought it was the only way to get America into the war. I have no idea and it really doesn’t matter anyway.

Sorry. I got sidetracked.

From the February 19th peak to the March 23rd low, the major market indices lost the following:

Dow Industrials -37%

S&P 500 -34%

S&P 400 -42%

Russell 2000 -41%

NASDAQ 100 -28%

That is a whole lot of red for such a short period of time. From the low on the 23rd to the high on the 26th, the major market indices gained the following:

Dow Industrials +21%

S&P 500 +18%

S&P 400 +21%

Russell 2000 +17%

NASDAQ 100 +13%

That’s a whole lot of green for only three days. However, the major indices are still down:

Dow Industrials 24%

S&P 500 23%

S&P 400 30%

Russell 2000 31%

NASDAQ 100 19%

It has been a crazy week and head shaking month, but that provides a little perspective as to what’s happened to date.

I keep talking about volatility and how it has abated lately as measured by the VIX. On each successive decline, the VIX has declined when it usually rallies. That’s a good thing, however, the volatility index remains stubbornly high at 60+. That is an important thing to watch. We need to see the VIX well below 40 and even 30 before normalcy can return. That won’t happen overnight, but on successive declines into April, we do not want to see the VIX spike higher again to above 80.

One of the many emails I received this week from the many updates I have done asked me if I am worried about anything. I literally laughed out loud. In the 31 years I have been in the business, I have ALWAYS worried about something. I especially worry when I can’t find things to worry to about as was the case to begin 2020. The problem at that time was that the underlying foundation of the market was still pretty solid. Uncharacteristically, it did not warn of impending problems.

Back to the question, of course I worry about things today. I worry that I am hearing only two possible market scenarios here. Either stocks put in a very rare “V” bottom on Monday and a new bull market has begun. Or, stocks are going to see a “W” low with one more decline to revisit Monday’s lows. I don’t hear anyone talking about the major indices cutting through the old lows. That concerns me. However, pundits change their opinions like I scrub my already raw hands these days, all day long.

Finally, there were only 27 stocks hitting new lows on Thursday. As you can seen below, we have seen fewer and fewer stocks doing this since March 12th.

The worst of the carnage should be behind us, but that does not insulate the stock market from an undercutting of Monday’s low. Now we get to watch which sectors lead on rally and decline days. The bulls definitely do not want to see staples and utilities up big on big up days. We want to see people moving into “risk on” sectors.

I will likely work on an update over the weekend since the weather looks crummy in CT and there’s not much to do anyway besides throw and hit with my kids. That’s baseball and softball, not physical violence!

Please stay safe and let me know if I can help you with anything.

Paul

If you would like to be notified by email when a new post is made here, please sign up HERE

Bulls Working on Three Straight

Bulls Working on Three Straight

On Sunday, I discussed the tiniest of green shoots and the scenario for stock market low on Monday followed by a rally. As I said at the time and since, I think it is “A” low, but perhaps not “THE” low. It is certainly a start and I am glad that the market responded to what was diminishing downside acceleration. It looks like those geniuses in Congress will finally pass a massive $2 trillion stimulus plan by the end of the week. I haven’t read the 1400 bill and likely won’t, but I do think it’s a flawed start at what needs to be done. I wrote about the other day in TRUE Shock and Awe. I have no doubt that once the bill gets around, there will be all kinds of nonsense included, but at least the Senate passed it 96-0. The unintended consequences will be extraordinary later this decade.

Yesterday, I discussed that this stock market bottom should not resemble 2008 where we saw the internal or momentum low in October 2008, followed by a revisit in November 2008 and final generational bottom in March 2009. That was five long months of bottoming which followed four months of topping in 2007. I promised to offer examples of how this impending low could shape up today, but it’s already lunchtime and I would rather finish this up and work on that tomorrow.

As I type this, the stock market is shaping up to see its third consecutive day of gains. If you remember, I have been writing that we hadn’t seen even two straight up days since early February and that would be confirmation that the tenor of the market was changing. I really hope that if this rally runs 20% off the bottom, we won’t see a chorus of “BREAKING NEWS: STOCKS IN NEW BULL MARKET” from the financial media. That would be embarrassing.

After three straight up days, no one should be surprised if Friday is a down day. I think there has only been one up Friday since mid-February, not that it really matters in this environment. Mondays have the same track record. After the four-week crash we have seen, it would be normal to expect a sharp snapback to regain at least a third of what was lost. That’s the rally we are seeing now. It’s sharp, violent and vicious.

Here are charts of the Dow Industrials and S&P 500 with my zones for the first bounce to hit.

 

If you would like to be notified by email when a new post is made here, please sign up HERE

Not “THE” Bottom – 2008 Not a Good Guide

Well Tuesday was fun! At least for the bulls. Monday pretty much bottomed on schedule and we saw unprecedented and massive buying off the lows. It was really across the board with some eye popping numbers, like 93% of the shares traded went into stocks going up on the day. They were more than 2500 net issues trading higher than lower which is more than 10:1.

In a vacuum some people would say that these are new bull market initiating numbers, or a thrust. However, given the depth and acceleration of the decline, right now, this is best viewed as a very strong countertrend rally in a short-term bear market. As I mentioned on Sunday when I talked about the tiniest of green shoots, I want to continue to see volatility decline and the flight to quality in treasury bonds end. The number of stock making new lows is down to a manageable number, for now, and that’s also good.

At the lows on Monday, I looked for things that did not make new lows and bucked the trend. Semis, long my favorite group, have been outperforming for several days. Likewise, software, internet, communication services. discretionary, homebuilders, materials and biotech. That’s a healthy number of groups that resisted that final wave of selling.

Let me close with this. All those people invoking 2008 as the model of how stocks are going to bottom will likely be wrong. The bear market began in 2007 and ended in 2009. It was 18 MONTHS long. This decline is 5 weeks so far. Stocks saw their internal or momentum low in October 2008, followed by a revisit in November 2008 and final bottom in March 2009 as you can see below.

I offer that while the bottoming process has already begun as I wrote about on Sunday night, it is going to take some time and more violent swings while the foundation gets repaired. I don’t believe it is going to last 5 months. I also do not believe the low from Monday is “THE” bottom. It should be “A” bottom.

A better model for the stock to bottom can be found from the 1987 crash as well as 1998 and 2011. I will pick up on that tomorrow.

Be well and STAY SAFE!

If you would like to be notified by email when a new post is made here, please sign up HERE