Hey look at that, a post!
Yeah it’s been a bit crazy, sorry about that. But I’m back now with another post, although I’m not sure how some will like this one.
The market’s obviously been a bit crazy over the last two months. In March, the market experienced its low, with the S&P 500 dropping to 2,191, 35% off its peak in February.
But by the end of March, the S&P had cut some of its losses, ending the month at 2,585. It then proceeded to gain another 12.7% in the month of April.
So that’s awesome, right? We’ve experienced the lows and now with the economy starting to reopen, the market is starting to normalize. Let’s all buy into our favorite stocks and put this whole crisis behind us.
Wait a Second! Put On the Brakes
I’ve been seeing a lot of investors in various groups I’m in thinking everything is great now and the bull market is back under way. And with the way the market’s been rising, who can blame them?
But the picture isn’t quite so rosy once you take a deeper look.
Unemployment is now officially over 14%. If it remains over 10% for a year (which, how could it not?) that counts as a depression.
Companies are filing for bankruptcy left and right. Small businesses are shutting down. LA just reported that they are extending their stay at home order for another three months. Fauci just said today that schools might not even open in the Fall.
There are warnings that if the economy opens too soon, there will be a second wave of the virus. And if there’s a second wave, the market won’t be happy to say the least.
Here’s the thing you have to know about the market: it is forward looking. We’ve been getting a bit of good news lately, from some states reopening, to a vaccine being underway, to Gilead’s promising new drug, Remdesivir, which has proven moderately effective against the coronavirus. The market loves all this stuff and investors are hoping that this means things will be getting back to normal soon.
The price of the market reflects the hopes and fears of investors. And with the S&P being just 15% off its highs in February, there are a lot of hopes priced in there. Probably too much hope, if I’m being honest.
In fact, Goldman Sachs just released a report saying they expect stocks to drop 18% in the next 3 months. And they expect only about a 2% upside, meaning that the market shouldn’t go above 3,000 by the end of the year. When it’s already been flirting with 2,950, that’s putting quite a ceiling on the market as it is today.
So investors are pricing in a pretty rosy picture. But, the chances of that rosy picture being reality, in my opinion, and also in the opinion of Goldman Sachs above, are pretty close to 0.
That only means one thing: once reality starts to set in, the market has nowhere to go but down.
The Technical Picture
You know how much I love my charts. But this chart to me gives us some very important details.
First of all, you can see that the S&P 500 rose above the 50 SMA around April 24 and has stayed above it ever since. You can also see that the 200 SMA is in its sights, and the bulls are trying to reach that level.
However, it keeps getting rejected around the 2,950 mark, where I drew in a resistance trend line. That’s about the level that sellers keep coming in and pushing the market lower, and it has yet to cross that line in the past several weeks, although it’s tried several times.
One of the analysts I follow called this area between the 50 SMA and 200 SMA “no man’s land”. You can see it’s been extremely choppy between these two levels, ping-ponging back and forth. The more aggressively it tries to cross above 2,950, the more aggressively it gets rejected back down into the 2,800s.
Yesterday was a great example of that. The market was green most of the day, trying to cross that 2,950 mark, but got violently rejected and ended up closing 2% lower at 2,870.
Now look, obviously I don’t have a crystal ball and can’t guarantee anything. But here’s what I expect to happen:
Sooner or later the rosy picture the market’s been operating by will start to have some serious holes poked into it. When that happens, we’ll see a serious downtrend.
In the short-term I’d expect it to drift lower into the 2,800s. Once more negative news starts to come in though, I’d expect it to retest that 50 day SMA, and eventually to break through it within the next month or so.
Once the full import of the situation we’re in and its long-term implications sink in, I personally feel the fair value of the market right now is around 2,500-2,600. It might take a few months to get there but I can’t see any reason in the short-term why it should be trading above that level.
Now the reason I posted this in the first place is because I’ve seen a lot of investors saying they’re buying up stocks, acting like the pullbacks are only temporary and gains are inevitable. They are acting as though we are in a bull market.
We are not in a bull market. We’ve been in a bear market since March and that bear market will last for the foreseeable future. What we’re experiencing is a bear market rally, nothing more.
Yet I’ve talked to people who are surprised when I say we’re in a bear market. Just because stocks are going up doesn’t mean the bear market is over.
This is not the time for a lot of buying, in my opinion. Certainly there are a few stocks that are a good value and will go up from here, especially with the way the coronavirus is changing our economy and allowing certain companies to flourish. But the great majority of stocks are still overvalued and are likely to experience another downturn.
I’d be shorting stocks right now, or else benefiting from the market volatility through option selling (as I have been doing successfully). But there are very few stocks I’d personally go long on at the moment.
This is of course only my opinion and is not intended to be taken as investment advice. You are solely responsible for all investments you make and I disclaim all liability from you following the recommendations in this post.