Market Overview- Navigate through the unknown BOTTOM territoryMadness cannot even begin to describe what three major indexes went through the past few weeks. Fastest 30% drop ever, followed by equally insane three consecutive days of massive gain last week. It felt like the whole stock market was going through the crypto type of rollercoaster ride!
One question remains in every investor's mind... Have we reached the bottom yet?
Macro perspective-
*QE to infinity with no limits, now includes the municipal and corporate bond in addition to treasury and MBS
*1 trillion federal deficit, but the growth was still below 2 percent
*2 Trillion relief package that forbids stock buyback and will be enforced with strict oversight
*Economic contraction is forecasted to be 15 percent or more in the second quarter
*Unemployment is projected to rise to 30 percent in a few months
*Q2-Q4 earning will likely be severely impacted
In nutshells, the underlying economic condition is already weakened with the crippling amount of national debts. The fact that Fed intends to increase its balance sheet with no limits tells me how desperate Fed is and how dire the economy is.
Historical perspective-
11 recessions in the past ended up lasting between 12 to 18 months. Only one of them lasted 2 months. Furthermore, never before has the bottom been reached in the beginning of the recession. Of course, some people believe that this market recession will not last long because unlike the 2008 crisis which was caused by the overheated housing market, this one was caused by the sudden panic sell driven by the external circumstance.
Technical perspective-
All three major indexes went down around 35% from their Feb. high during this unprecedented crisis, indicating that the market is already in the recession mode. However, Dow has since then bounced back strongly and is currently up around 20% from its low. Technically speaking, the market is not officially in the recession until all three major indexes stay 20% below their highs for at least a month or two. However, It seems that it may not be the case if the current rally continues which will send the Dow back above its 20% drop from the February high and possibly test the resistance lvl at SMA200. Only time will tell.
If the market is not at the bottom yet, how much lower can three major indexes go? 50% low from their Feb. high would send three major indexes way blow their 2017 price lvl. If such a scenario plays put, it will send a shockwave throughout the market and exacerbates the already deteriorated investor confidence.
I would not pay too much attention to the technical lvl until the VIX goes back down to around 30-40 lvl. During the rare, panic-sell frenzy, anything is possible. We have already witnessed the fastest 30% drop and the biggest 3 day rally in the history so be ready and prepare for anything to happen.
Market sentiment-
Market sentiment is everything at this point. The impeccable timing of 2 trillion relief bill seemed to have cancelled out the effect of the record high unemployment filing claims last Thursday. Even when U.S infected # exceeded that of china last Friday, the market did not react too drastically. Moreover, Yesterday's announcement of April 30 lockdown extension did nothing but boosting up the market today. Perhaps, the Covid-19 fear is already priced in or the selling pressure is exhausted?
Covid-19 progress-
The catalyst that summoned up the financial storm will also be the one that ends it. The exponential growth must be stopped before any sense of normalcy can return. By all metrics, growth factor, infected per 1 mil, death per 1 mil, positive %,, # in serious/critical condition, recovery rate, fatality rate all indicate the somber news that the exponential growth is still climbing.
Let's take a look at the projection in the website below
covid19.healthdata.org
Keep in mind that the projection is based on the assumption that most people will follow the social-distancing practice and ventilators will not run out (Ford, GM and Tesla have set out to produce more ventilators).
According to the projection, if we don't get the second wave of infection because of the lax lockdown rule or the undetected virus carrier coming from countries that have not yet experienced the outbreak, we should expect everything to return to certain degree of normalcy and economy to begin the recovering process in May.
When that happens, investors may not rush back into the stock market in droves, but it could at least serve as the crystal clear sign to investors that the worst part is over.
