We have had the first leg of this market move and now the call is, is this the low or just a first leg down?
As I wrote on 25th, Im out of the market since 24th February, so for me it is a matter of finding a reentry point rather than predicting the low. Others however may be left wondering where next for the US markets. Is it back up, in this ‘buy the dip’ orthodoxy world or down further to a full blown crash.
Have we had a correction or are we in for a crash?
To me the model has been simple. The Coronavirus is going to hit the market hard. It is just a case of how hard and I have been discussing this and what to do in these articles:
25th February If the market crashes what next.
26th February What investors should do
Now we are back deciding what next?
So the model I’ve been running is one of firewalls. The spread of the virus outside these firewalls causes the market to drop.
There was the China firewall, which was breached. Then there was the European firewall which was breeched kicking off the correction we are now in. Lastly there is the US firewall which if seriously breached will set off the next leg of market fall. If the US firewall is breached it will likely kick the markets into crash territory.
25% down is a crash and most historic crashes skid to a halt between 25%-30%. It takes a monumental situation to kick things down below those levels, but it can happen. The chances are worse because the market has been so high, but it is a good idea not to get too pessimistic.
Here is what a crash would look like and is what I expect is the US should be breeched in the way Europe has been breached initially in Italy.
This is a modest fall from here. A full on crash could look like this:
That would be a seriously bad move.
The call is, are we going to get these legs down or is the market going to stay afloat?
I think it is going to crash, with both of these charts a solid potential outcome. I think the current levels will need a near miracle to hold but with all the central banks ready to hose money into the world economy, you can never be sure that miracle won’t be engineered.
Whatever happens don’t try and buy the immediate bottom. This is not going to be a V shaped bottom because the ramifications of all the disruption will keep the market suppressed for weeks after the bottom as it will take time for the market regains its poise.
I simply can not see that we have plumbed the depths yet and the current volatility clearly demonstrated that the market does not know where this road leads. That uncertainty is very seldomly a bullish sign and is more commonly a sign of a pause in the bad news.
This situation is going to take weeks, perhaps months to pan out and I believe we will see significantly lower levels on the global markets.