Stocks Next Leg Down

Based on a global breadth indicator that foreshadowed both the 2018 Q4 and 2020 Q1 stock market crashes, stocks are due for another leg down. The weakness seen so far this week is just the beginning.  

This is supported by the overdone rally off the March 23 lows, taking stock valuations back to near all time highs even as the real economy sinks into depression.  Enthusiastic traders and pavlovian buy-the-dippers have priced in a V shaped recovery, but that will not happen.  As the realization sinks in, so will stock prices.  

Whether or not the March lows are taken out is a popular parlor game with pundits, but we won’t quibble.  Whether or not that turns out to be the case, stocks are due for another steep selloff.  That said, my take is that last quarter’s selloff was not a bear market, just the opening act of a bear market.   As we’ve said before, media lite declarations that the rally off the March lows marked the end of a bear market and the beginning of a bull market based on arbitrary 20% thresholds are nothing more than linguistic sophistry.  Financial reporters can’t just draw magic lines with terminology and expect the markets to conform.  

Whatever level stocks bottom at, it’s unlikely to come before this fall.  The ultimate lows could even be a couple years off.

5 thoughts on “Stocks Next Leg Down

  1. jk says:

    see Bob farrell’s rule#8
    also examine charts of crashes in 29, 73-74, 00, 07. crash, bounce, then the slow grind down.

    interesting to see your indicator saying the same

  2. Bill Terrell says:

    Exactly, JK. Those bear markets each represented a retreat from an overvalued and overleveraged state. And declines of 45%-90% took 1-3 years to play out.

    Even if the plague itself turned out to be a V-shaped affair, we still have historic overvaluation and leverage to clear. And we already have depression level unemployment. The notion that this time it took only thirty something percent over just a few weeks would be astonishing if it turned out to be correct.

    Bullish scenarios are hard to imagine, but one that comes to mind would be if the Fed announced it was going to cancel all the Treasury debt on its balance sheet, and keep on buying. Or that it would just start cutting checks, say $10,000 monthly, to every American. Stock prices could skyrocket, but only as a result of the dollar plunging in value. The S&P could go to 5000, but a loaf of bread could go to $50 too.

    Of course in this context “bullish” is a bit of a misnomer, because real stock values would be collapsing regardless. The declines would be more obvious pricing stocks in terms of gold.

    Positive real returns on US stocks over the next year or few would be virtually incomprehensible.

  3. Bill Terrell says:

    Follow-up: Well so far we have gotten this one spectacularly wrong. Rather than head back down, since making this post on May 13 stock prices went on a renewed tear. For now we will plead “early”, but if a meaningful retreat does not materialize before the end of this month we will have to plead just plain wrong.

    My current analysis asserts that whatever may happen to cash prices, the next move will be down in gold terms. This is due to a relative overbought-oversold condition having developed as a result of stock prices catapulting higher as gold prices stagnated. This has become stretched to the point it would be difficult for stocks not to underperform gold in the coming weeks.

    1. Bill Terrell says:

      This is the turning point we’ve been waiting for. Stocks are selling off sharply as gold rallies. Momentum yields to mean reversion.

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