Market Completes A 50% Retracement
The comments below are an edited and abridged synopsis of an article by Lance Roberts
Over the past few weeks, we have had a strong, oversold, reflexive rally that has reversed the conditions that fueled the advance. The market has completed a typical 50% retracement of the previous decline.
Excess liquidity will flow into markets short-term; however, eventually, the markets will reflect the underlying economic destruction.
While 2008 was bad, the effect of the economic shutdown due to COVID-19 will be worse for several reasons.
In 2020, the shuttering of the economy caught many businesses ill-prepared for the shuttering of businesses. The surge in unemployment will have a greater effect on gross consumption in the economy than in 2008. There are many businesses that will never reopen, many more will be slow to recover, with the rest slow to rehire until demand returns.
The markets are rallying on a flush of liquidity and a massive short-covering rally, which is likely reaching exhaustion. Over the next few months, stocks will begin to price in the severity of the economic damage, a substantial decline in earnings, and the realization that hopes for a V-shaped recovery are not likely.
While there are lots of market analogs making the rounds comparing the current crash to 1929, 1987, and a host of other periods, it is 2008 that has the most similarities.
We have had a strong rally on hopes that the Fed’s interventions will fix the problem. Not unlike the bear market rallies seen in 2008, the current rally has taken the market back to more extreme short-term overbought conditions.
While many suggest that the markets are looking past the current quarter, this likely isn’t the case. It has been an oversold bounce, fueled by a lot of short covering.
If you are hoping the bear market is over, and have jumped back in with all your capital, you are in good company, as many others have done the same. Just prepare to be disappointed in the months ahead.