Super long term view to put in context the current events of March 2020 and try to assess the probabilities of a bear market.
As you can see when you draw SPX in log scale you can draw some pretty accurate trendlines that hold for the whole history since 1929.
March 2020 touched (and even dropped below) the lowest yellow trendline, so I just compared other historical moments when this happened in the past to try to get some insights about whether we might enter a bear market or not. I'll start in 1953 as it is the first time it touches the trendline afeter a multiyear bull market (1942-1952).
As you can see, the bull market continues after touching the trendline in: - Recession 1953 - Kennedy slide - Black Monday - Savings and loans crisis - Dot com bubble - Slowdown 2015 - Slowdown 2018
The trendline does not hold and is followed by a bear market in: - Vietnam war - GFC 2008
Therefore to assess the probabilities of the line not holding and being followed by a bear market in 2020, we should analyze all these scenarios and put them in context asking two questions: - What motivated these recessions? - What was the response of the FED and the government?
So analyzing the two bear case scenarios: - In the case of Vietnam War, measures to get out of the recession included lowering interest rates and breaking the Bretton Woods agreement some months later. This caused later a peak of inflation during the 1970s in the US. - In 2008 once FED dropped interest rates and started QE market bottomed and a new bull market started.
In bull case scenarios (rest of them) measures taken included usually lowering interest rates + some kind of fiscal or monetary stimulus.
Now 2020 is another different animal. Interest rates were already low before 2020, so we have the law of diminishing returns playing out here, it will have little effect as a policy response. Therefore MMT will be the path to follow with a coordinated monetary and fiscal response.
My take is that this will create an environment similar to that in 1970, when inflation took place because of the doubts about the US being able to pay in gold terms (remember De Gaulle). With US Treasuries returning 0% there is little to no incentive from international investors to hold them, and they may start dumping them to get the dollars they need for international payments, this can create an inflationary spiral in which FED will be the only buyer of US Treasuries thus effectively monetizing debt, and trust in US dollar as a reserve currency will be lost leading to a reform of the international monetary system (all hail crypto?).
However I think this kind of crisis in the SPX will cause equities to keep rising just by mere inflation caused by MMT and TINA (there is no alternative). A bear market would only be possible under more restrictive monetary policy or if deflation caused by coronavirus could not be reversed, but currently this does not seem to be the case.
This chart is why you hear every legitimate investment pro say to keep your long-term (20 to 50 year horizon) retirement investments in broad index funds. Inflation isn't going to be a problem. The fed has struggled for decades to keep inflation up to 2% and repeatedly fails at it. Inflation isn't a bad thing either - it'll wipe out some of the income inequality. It will really only hurt retirees, but that can always be fixed with COLA adjustments.
AlexX0
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Looks like 1600 will be the bottom :)
WKMAnalytics
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@AlexX0, in fact I thought we would fall there, but the FED managed to stop it at 2200. Given that the spike in volatility that we also had was only comparable to that of 2008, I see highly unlikely another spike in the next few months. Of course, there will be volatility, and I think some retesting of previous gaps but it is hard for me to see lower lows given that we will have the presidential elections in a few months. My rule is simple: buy around 2500, sell around 3200, if SPX breaks the line again, just get out or cover with protective puts.
AmyLand
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Excellent Analysis And very well explained..interesting things
Ringding58
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Yes around 1600 will be bottom.
The world wont end. in 30 years all will be up. Only the printing could be the biggest damage done long term.
WKMAnalytics
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@Ringding58, exactly, that's my point. I think trying to predict what SPX will do in short term is futile. We just had a triple top, and a range bound trading, which is the last thing I would expected following the lows of March. At this point any technical analysis is insufficient to assess the odds.
The only things I'm monitoring are the price of put options, and right now the price of a PUT @ 2200 for September 2020 implies a 2% probability of profit, so it seems quite unlikely to revisit new lows.