Bottom formation versus new test of the lows

By 07/04/2020News

07.04.2020 – Special Report. The question of all questions, which is currently preoccupying all stock market participants: Has the floor moved in now? For many investors the worst seems to be over. Or was the recent rapid recovery just a countermovement in the bear market? It depends on who you ask.

Is that it for the Corona crisis now?

The sudden turnaround from the previous low on Wall Street after March 20 has been extremely rapid. Perhaps prematurely. We have therefore taken a look at the decisions of some players in the financial market and extracted the most interesting arguments for bulls and bears. We hope that you will make the right decisions when trading CFDs or online stocks.

In search of the ground

The arguments of the bulls sound plausible: With enormous speed, the USA in particular has launched gigantic aid programmes – 2 trillion dollars, including helicopter money for every American. The Fed is already working on a new program to support small businesses. The governor of New York, Andrew Cuomo, suspects that a plateau has been reached in the US virus hotspot in the matter of Covid-19. Italy reports a small increase in new cases. In Europe and Asia, too, massive economic stimulus programs have been launched.

Imminent depression

But also the bears have some facts on their side: The impact of the deflation shock on corporate earnings worldwide is still impossible to assess. Many smaller companies in particular are likely to collapse soon if reserves run out and government loans are not sufficient. The former head of the Federal Reserve, Janet Yellen, suspects that unemployment in the USA is currently at 12 to 13 percent. In her opinion, the US economy will probably shrink by around 30 percent. So the truth is in the eye of the beholder.

Morgan Stanley’s turning into a bull.

One of the biggest bears on the market has just mutated into a bull: Michael Wilson of Morgan Stanley confessed to being the “buyer of dips” because the region of “2400-2600 on the S&P 500 will prove to be very good entry points for those with a time horizon of 6-12 months.” Recently, he explained to his clients in his weekly outlook “Sunday Start” why he switched sides. The essence: “Bear Markets END with Recessions”. The question remains for us what happens in a depression. In the end, the Great Depression of 1929 lasted a bitter 43 months. How long will this deflation last? Or will it really remain “only” a recession because of the countermeasures, quickly washed away by masses of freshly printed money?
This is exactly what Wilson of Morgan Stanley was aiming for. He wrote:
„To summarize, with the forced liquidation of assets in the past month largely behind us, unprecedented and unbridled monetary and fiscal intervention led by the US, and the most attractive valuation we have seen since 2011, we stick to our recent view that the worst is behind us for this cyclical bear market that began two years ago, not last month.“ And then he referred to a currently almost unthinkable bullish factor: inflation could return.

Bear remains bear

And so to the opposition. Hedge fund manager Dan Niles continued to come out as a bear in an interview with “Yahoo Finance”. He had already warned his clients in February that the market had not yet considered the consequences of Corona. Accordingly, he had positioned his Satori Fund and made profits in the worst quarter of the Dow Jones.
Now he warned according to Marketwatch: “If you go back and look at history, there are nine times that the market has sold off about 30% or so since the 1920s, so it’s pretty normal.” “You get one of these every 10 years or so and if you look at every one of them, you always get these bear market rallies.” Accordingly, Niles warned that even after the painful pullback, valuations were still far above historical norms. It could well go down another 30 percent. He did not believe in a V-shaped recovery because of the unemployment rate of around 10 percent; he even suspected that unemployment in the USA would be more likely to be 20 percent. And on the globe the situation is no different. That’s why he has further expanded short positions. However, he has bought into sectors that should prove resistant to new bear markets. Specifically: Activision, Take-Two Interactive and Amazon.

Goldman warns of lack of share buybacks

For Goldman Sachs customers, too, everything revolves around the question of whether the market will test its low again. One factor that could answer this question is the issue of share buybacks. The investment bank warned that around 50 US corporations have now put their payback programs on hold. This would correspond to a sum of 190 billion dollars, or a quarter of the total amount in 2019. Further caps are likely to be imposed. This means that an important bullish factor is missing on the stock market. Chief equity strategist David Kostin said: “higher volatility and lower equity valuations are among the likely consequences of reduced buybacks. His forecast for 2020: Dividends in the S&P 500 will fall by 25 percent this year and buybacks by 50 percent compared to 2019.

1987 or 1929?

And this brings us back to Morgan Stanley’s initial analysis and the answer to the question of whether the low has now been reached. Here is the unsatisfactory answer: It depends on the nature of the setback and whether history repeats itself. If we are dealing with a crisis along the lines of the 1987 crisis, then in the short term – i.e. in the two to three months following the low – a retest should be imminent, but then a rapid V-shaped recovery. But if we are dealing with 1929, then no retest is to be expected in the short term. After the crash in the fall of 1929, the Dow ran up until the spring of 1930.

And now the evil trap: Everything depends on the time horizon. The blog “ZeroHedge” marked the spoilsport here and looked at the performance of the Dow Jones during the Great Depression of 1929 on a three-year horizon. And then it really gets uncomfortable for the bulls.
The Bernstein-Bank wishes you good luck with your trades on this one hand and on the other hand!

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