Broken hearts for bulls, optimists, and dip-buyers
Although their hearts have been broken once again today (unless they're still in denial), the news isn't all bad. Mostly bad, but not terminal. The Dow is now in a bear market but the S&P 500 managed to stay above the bear market Maginot line of down 20%. We'll see how long that holds.
Another historic market decline today
Today's market drop ranks as the 28th worst day out of 17,684 trading days since 1950. If we're not careful, we might exceed 2008 as the longest series of historic down days in history.
The table below shows the 28 worst market drops since 1950. Note that 11 of them were from 2008. The worst of the worst was an outlier - Black Monday, 1987. Could we be headed for another Black Monday? I don't know, but today's market drop and the recent series of drops are concerning.
Is there any good news? Yes, if you believe in oversold bounces, as I do. The question is how to play them? Do you assume that they will run up to make new highs? Or do you use them to unload weak holdings and get short?
It's up to you, of course, but we're in a very fluid market that could go either way. How confident are you in the way you're playing it?
Dip-buyers' last stand
I want you to take a close look at this chart because I think it reveals something important. This chart covers the period from January 2019 to today. You can see every dip, and the success of the dip-buyers all along the way. Up until recently, that is.
When the market topped on February 19th, the dip-buyers were still in control and they have been buying all the way down. There were 7 consecutive down days from the 19th to the 28th of February, and the dip-buyers were there for all of them. The problem is that the rally-sellers had more ammo and they overwhelmed the dip-buyers.
Then, on March 2nd, the rally-sellers took a break and the dip-buyers took the market up by 4.6%. I have named this the "Sweet Doomed Angels" rally.
After that, the rally-sellers returned and drove the market lower, to where it ended today. The S&P 500 is now down 19% from the high water mark it made on February 19th. Is this the dip-buyers' last stand? I don't know, but it doesn't look good for them.
Final thoughts
On Christmas Eve of 2018 the market was down by 19.8% and the dip-buyers rallied it all the way back to new highs. It could happen again. But we didn't have a pandemic back then, and we didn't have a crude oil price war either.
We didn't have countries quarantining a third of their population, or sports events taking place with empty stadiums. This isn't 2018. Things are bad, and they could get worse. Companies in hard-hit sectors are initiating massive layoffs. Corporate earnings estimates are coming down. Travel & Leisure - the largest component of US GDP - is among the hardest hit sectors of the economy.
On the positive side, rates are low, the Fed is ready to help, and more fiscal stimulus is coming. Will it be enough to keep the global economy from slipping into a new recession? Again, I don't know. But it doesn't look good from where I sit.
Erik:
You hit the nail on the head. This time it is very different. There is no way to know how the pandemic will be brought under control. I just heard the President’s speech and it was so underwhelming. Compare this to how Bush Jr handled 9/11. I don’t have the confidence that either party can handle the situation effectively together or individually. I am going to 50-50 allocation until the dust settles down.
Looking into tape I do not see massive panic. Orderly selling every single day. It’s bad for market. Usually before bottom, bulls and bears have to be destroyed , have to be mentally unstable on both sides. Waiting for that day. Technically – internals are oversold and ready for rebound, but we have another problem !!!!!!! Too many passive investors and they unloading ETF’s. ETF has many stocks, when it’s sold, market maker has to sell all components from that etf. So never ending story.
Vanguard received massive inflows in last 2 weeks. Ma, Pa is buying. They have to be destroyed also. I do not have a crystal ball, but see more selling to come.
Governments and FED destroyed asset allocation 50/50 . Now bonds are more scary then stocks. Asset allocation and correlation was destroyed by ” helicopter Ben “. The only way to hide now is cash. System is broken, we need a lot of changes, otherwise next downturn will be DOLLAR destruction and the end of USA superiority. Hope do not see that in my life .
Andy
We are now down 8% today and I do not see panic in price action !!!!!
We are oversold , 5 standard deviation, and there is no panic !!!!!
Something is broken in markets.
Andy.