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.