Now that we know the virus is not going to get even remotely close to what the models were projecting (for now). I think it’s relevant to compare this V-shaped price recovery to the December 18 market plunge.
Dec. 03 peak to Dec. 24th trough = we plunged 17.10% (in 3 weeks)
From that bottom to Jan. 18 peak = we rebounded 14.74% (25 days) -->We recuperated about 86.5% of that percentage loss
Feb. 19 peak to March 23rd trough = we plunged 35.72%
From that bottom to our April 20th peak = we rebounded 31.5% (also 25 days!) -->We recaptured about 88% of that percentage loss
*Now why did I choose these specific dates?? Answer: Because both April 20 (2020) and Jan. 18 (2018) are the peaks we made before we deviated from that “V-shaped recovery channel”
Conclusion: In both V-shaped recoveries, we recapture roughly 87% of that % loss in “coincidently” 25 days as well. And then deviated out of the V-shaped channel, tested the nearest support for confirmation, and tipped off a new bull market. It probably boils down to some sort of market psychology that repeats in these types of circumstances... Now unlike the conventional belief right now, why is it all of sudden relevant and perhaps helpful to compare this crash to December 2018’s? 1)it’s the most recent liquidity crisis we’ve had 2)it was an overreaction to the potentiality of something -fear that we’re due for a recession because this bull run is much longer than its predecessors -this cycle has lasted for 10 years whereas the average is 4.5 years. This does not constitute a recession! -However, this bad logic no longer mattered once the fear becomes a contagion 3)The unraveling effect. This begins when people are provoked(by media) to look for these assurances and “oddly enough” they find these assurances
As the wise Nassim Taleb says when describing cultural products, "It is hard for us to accept that people do not fall in love with works of art only for their own sake, but also in order to feel that they belong to a community. By imitating, we get closer to others-that is, other imitators. It fights solitude."
Just think about it for a minute. If you were really to boil down and I mean really...The Covid crash, Dec. 2018 crash, Feb. 2018 “Peak”, Dot Com tech bubble, 01’ panic were all triggered by nothing more than a cultural product. How do contagions come about? We as humans scorn the abstract, we hate uncertainty. What we have is an aptitude for reduction. We find patterns where there are not (at first). Where can these patterns be found? What does the current language around me sound like? Most people just accept this as truth but all it is, is majority opinion that becomes so widely accepted that it becomes reality.
This according the book Black Swan is called “platonicity” which is our tendency to mistake the map for the territory. We focus on the pure and well-defined forms, the overgeneralizations, the things that make sense. And where things get dangerous is when, “...these ideas and crisp constructs inhabit our minds, we privilege them over the less tractable structures
Platonicity is what makes us think that we understand more than we actually do. Now obviously this does not happen everywhere. Only in specific applications are these models, and constructions, these intellectual maps of reality wrong. “These models are like potentially helpful medicines that carry random but very severe side effects...The platonic fold is the explosive boundary where the platonic mindset enters in contact with messy reality where the gap between what you know and what you think you know becomes dangerously wide. It is here that the Black Swan is produced.” (Nassim Taleb)
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I'm sure many of you are poking around, and the language you're hearing is very bearish. I think from a capital manager's perspective this $2930-3000 SP500 (61.8 retra.) level is obviously a very attractive range to exit for many obvious reasons. And like I said, we've deviated from the "V phase" so the market is getting ready to decide. If this triggers the rest of the market to unwind their positions than get ready!!! Another market liquidity crisis is possible
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Yes there's a dislocation of price versus value, yes we've rallied at a slope and rate that we've never seen before. And obviously it's not rocket science to have a bear story here. That's why I am offering a contrarian perspective. We retraced back to Fib 61.8 levels (SPY $294). And I think bedrock buyers realized that this is a very safe place to exit. Only 13% from the high and if you consider the tailwind we just saw, it's obvious why many capital managers exited. Therefore, I think the market is throwing us a bone here because the "trend is our friend" and until we fall through $281 SPY we are still in an uptick. Target of SPY $310 if we hold.
I was thinking very much like you until 3 days ago. We re in a very different price cycle than we were in the 2018 bottom. We are at the confluence of two leg 5 wave 5 formations similar to 2001. If it feels to good to be true without solid fundamentals, it probably is. Big tech will be the downfall of this rally from simple over valuation and greed. Elon said it this morning, he just wants to look like a savant from what chartists are already seeing.
Good analysis, except for missing a pretty major point: the December 2018 meltdown was NOT V-shaped. Like everything in the markets, it goes in waves, and the decline had started at the beginning of October, going down in 3-5 waves, depending how you look at it. I am neither a bear nor a bull, I just try to trade the market I see, not the one I wish for. I have been both long and short the last 2 months, but I do feel better making money 'long' and not betting for a meltdown. I am currently long with TQQQ and SOXL, believing that the last 2 days are merely a pause and they will both go another 5%-10% above their 4/29 highs. However, if I am wrong on that and they take out their 4/21 lows (and my stops), I believe the 2nd leg down will have started and I will then go short again probably with SDOW & TZA since DJI & RUT tend to be the weakest indexes and therefore the safest short bets, imo.
Sintar123
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Nice comparision, but careful when forecasting the market based off of what happened in the past. I think we will retest the lows in May-June. There are differences between now and 2018. For one, we came down in 2018 in a clean sharp bottom, that looks more like a V. In this case it wasn't so much a V but a zigzag bottom structure.
TheMandalorian27
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@coolioyo, All valid points, but if you look at the charts the V bottom is nearly identical. Now the only difference is that this bottom was created by force. The Fed stepped in and fixed the liquidity crisis in market by launching the bazooka. But that cushion triggered people to hop on the artificial bandwagon which has now become a legitimate bull market rally. Yes we're in a price bubble but they've been saying we're in a bubble the last 25 years. And guess what the market proves them wrong every time, and as history has shown, the odds are in your favor to be a bull not a bear most of the time. We've been in a valuation bubble for so long now. You know why? Because people are just willing to pay a higher premium for American companies. And as long as majority agrees to continue that, this bubble can stay propped up for as long as we want
Sintar123
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@TheMandalorian27, look at the other indices, Nikkei, RTY They don't look like V-bottoms.
Paul-adam
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Well done
serge7m
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what would be a good way to "get ready" for potential market unwinding (beside increasing cash position)?