COVID-19 all around the world with almost literally no country free of its impact. As of today, Sunday 29th of March 2020 the total confirmed cases (well below the estimated real cases) is of 700k people, of which around 34k have reportedly died of the virus.
Before this crisis started the S&P 500 hit 3393.5 points on the February 19th 2020. The US economy was rampant and the same could be said for almost the rest of the developing world. On March 23rd the same S&P 500 touched it lowest (so far) at 2191.75 points. That’s a free fall of 1200 points in just four weeks! Since then it has recovered a bit and now is seating at 2541 points waiting for the open tomorrow Monday. So the question is… are we there yet? Was that the bottom?
In my opinion, unfortunately no. We didn’t it rock bottom yet. There are two main lines of thought that make me think like that. The first is news-driven while the second is deduced from analyzing the market.
For the news-driven, I think that cases in US will get higher in the coming weeks; economic activity will almost stop in the US as it has already happen in some European countries; and overall, we are still far away from the end of this health crisis (later will come the economic crisis). But we are not here to discuss news but to analyze the market, so let’s have a look at it.
On the first screenshot you have the SPY from March 2015 until today March 29th 2020. In the price graph there are 3 indicators. The white line is the ALMA moving average for the price, so we can compare averages instead of single price bars. The blue line is the 50 SMA and the orange line is the 200 SMA. On the lower graph is the XBP Efficient Ratio indicator, which is an oscillator that indicates overbought / oversold areas and can detect tops and bottoms with bullish and bearish divergences with price.
At the end of 2015 and beginning of 2016 the Efficient Ratio indicator correctly signals the oversold price areas and the market recovers from there. At the end of 2018 we have a dead cat bounce with an oversold bullish divergence that signals the bottom. During 2019 you could have bought the dip on each occasion just by checking this indicator and you would have been right all the time.
Now as of the situation that we have now. We have a fall of 1200 points, which obviously moves any oscillator to an oversold reading. Is to expect a dead cat bounce of some sorts plus a second oversold reading with a bullish divergence, before we can call it a bottom that could hold. And considering the magnitude of the fall, I would expect more than one divergence reading before we can call it a bottom.
If we step out of the XBP Efficient Ratio indicator, we also see that a “dead cross” is coming next week. 50 SMA will cross below 200 SMA and that will hit the news worldwide. Add that to a sharp increase of virus cases in the US and you have a strong bearish force in the market again.
Let’s now check these indicators with some more data from past years. Let’s start in year 2000…
You can click on the image and start checking the indicator readings and compare with the market reaction. I’m hoping that today we are at a similar point like in first week of November 2008. Let’s have a clearer look:
We can see how there was a “recovery” on the first week of November 2008 after the big fall, but that recovery was short lived and the market continue to experience strong bearish forces until March 2009. See how there was bullish divergence in XBP Efficient Ratio in November 2008 but, despite having a bit of recovery beginning 2009, the market was still not ready to recover until it forced a new lower low.
In 2008 the market lost 50% of its value. From highs of around 1500 points to lows of 700 points. If now we are being told that the situation is worst than in 2008, if the market has to lose at least 50% of its value, that will take us from 3400 points to 1700 points… at least!
In summary… no we are not there yet unfortunately. There is nothing out there that can tell us that we are near a bottom of any sort. Only an unexpected unimaginable chain of fiscal measures could avoid what is coming (and with that I mean world banks resetting the counter of debt for all governments plus some free money to start all over again… that would be the only quick experimental exit that could save us).
Good luck and stay home!
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