SPX: The Great Depression and Today's Market 1W (Apr. 27)
X FORCE GLOBAL ANALYSIS:
The Great Depression that took place in 1929, took 10 years to recover, and is still remembered as one of the most devastating events that hit the stock market. Today, the stock market is recovering from a devastating hit caused by a virus outbreak (COVID-19). Governments and banks have worked together, initiating both monetary and fiscal policies to resuscitate the market. However, doomsday theories arise, comparing the current situation to that of 1929. In this analysis, we explore the possibilities of a Depression in 2020.
Analysis
- First off, we look at the technicals, comparing the Dow Jones Industrial Average in 1929, and the S&P500 in 2020
- Visuals demonstrate a similarity in terms of the general trend
- Both charts start off with a parabolic move (not demonstrated above).
- Then, a phase of consolidation - marked by the red zone - which represents base 4 of a parabolic move
- The first thing to note during this phase is that we see an extended bearish divergence
- Prices form higher highs and the Relative Strength Index (RSI) forms lower highs, demonstrating a lack of strength in the bullish trend
- After reaching the peak, we see the Moving Average Convergence Divergence (MACD) form a death cross. This death cross marks the beginning of a temporary bearish trend reversal
- Then a bounce near the trend line takes place. During the Great Depression, DJI bounced over 50% before continuing to drop. SPX has currently bounced over 30%.
- As it bounces, an ascending bearish wedge pattern is formed
- As the ascending wedge pattern reaches resistance between the 0.618 and 0.5 FIbonacci resistance zones, a rejection takes place
- Prices drop further, and we see a continuation of a downtrend following the descending trend line, marked by the dotted purple trend line.
- According to Ray Dalio, one of the most successful hedge fund managers in history, there are debt supercyles
- The last debt supercycle ended in 1929, and usually last 50-100 years
- Because this crisis was initiated by a viral outbreak, the real economy has also been significantly damaged, with unemployment rates having skyrocketed
Counterarguments
- Unlike the government and banks back in 1929, we are more prepared for a crisis today.
- The US has initiated Quantitative Easing at an unprecedented rate, and the Fed has cut interest rates like never before in history
- As biomedical companies heavily invest in medicines and vaccines, we see hope in eradicating the virus.
- Since this crisis was triggered by the virus, mass production of a vaccine could immediately end the crisis (driven by bullish anticipations of the future), and possibly take us to all time highs
- The doomsday prediction has been a popular argument for years. Ray Dalio has also been taking about the possibility of a debt supercycle since 2016.
Market Sentiment:
The fear and greed index for the S&P500 Index still points towards fear, despite the huge bounce we have recently witnessed.
What We Believe
It's impossible to perfectly predict and time the market. Leveraging for maximal positions in the market is definitely not optimal, and so is terminating all positions to catch the bottom. We believe that the trend is your friend. Identifying short, medium, and long term trends is absolutely essential, and choosing the right stocks, with strong fundamentals that can stand the test of time throughout this crisis, is the recipe for success.
Trade Safe.
The Great Depression that took place in 1929, took 10 years to recover, and is still remembered as one of the most devastating events that hit the stock market. Today, the stock market is recovering from a devastating hit caused by a virus outbreak (COVID-19). Governments and banks have worked together, initiating both monetary and fiscal policies to resuscitate the market. However, doomsday theories arise, comparing the current situation to that of 1929. In this analysis, we explore the possibilities of a Depression in 2020.
Analysis
- First off, we look at the technicals, comparing the Dow Jones Industrial Average in 1929, and the S&P500 in 2020
- Visuals demonstrate a similarity in terms of the general trend
- Both charts start off with a parabolic move (not demonstrated above).
- Then, a phase of consolidation - marked by the red zone - which represents base 4 of a parabolic move
- The first thing to note during this phase is that we see an extended bearish divergence
- Prices form higher highs and the Relative Strength Index (RSI) forms lower highs, demonstrating a lack of strength in the bullish trend
- After reaching the peak, we see the Moving Average Convergence Divergence (MACD) form a death cross. This death cross marks the beginning of a temporary bearish trend reversal
- Then a bounce near the trend line takes place. During the Great Depression, DJI bounced over 50% before continuing to drop. SPX has currently bounced over 30%.
- As it bounces, an ascending bearish wedge pattern is formed
- As the ascending wedge pattern reaches resistance between the 0.618 and 0.5 FIbonacci resistance zones, a rejection takes place
- Prices drop further, and we see a continuation of a downtrend following the descending trend line, marked by the dotted purple trend line.
- According to Ray Dalio, one of the most successful hedge fund managers in history, there are debt supercyles
- The last debt supercycle ended in 1929, and usually last 50-100 years
- Because this crisis was initiated by a viral outbreak, the real economy has also been significantly damaged, with unemployment rates having skyrocketed
Counterarguments
- Unlike the government and banks back in 1929, we are more prepared for a crisis today.
- The US has initiated Quantitative Easing at an unprecedented rate, and the Fed has cut interest rates like never before in history
- As biomedical companies heavily invest in medicines and vaccines, we see hope in eradicating the virus.
- Since this crisis was triggered by the virus, mass production of a vaccine could immediately end the crisis (driven by bullish anticipations of the future), and possibly take us to all time highs
- The doomsday prediction has been a popular argument for years. Ray Dalio has also been taking about the possibility of a debt supercycle since 2016.
Market Sentiment:
The fear and greed index for the S&P500 Index still points towards fear, despite the huge bounce we have recently witnessed.
What We Believe
It's impossible to perfectly predict and time the market. Leveraging for maximal positions in the market is definitely not optimal, and so is terminating all positions to catch the bottom. We believe that the trend is your friend. Identifying short, medium, and long term trends is absolutely essential, and choosing the right stocks, with strong fundamentals that can stand the test of time throughout this crisis, is the recipe for success.
Trade Safe.
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