I’m not very confident in the complete accuracy of any analysis out there, including my own. How’s that for a confidence inspiring opening?
Fundamental indicators, for example, do not account for a once in a hundred year pandemic. As Jason Goepfert of sentimentrader says “The outcome of this recession really boils down to a battle between pandemic (which you can’t predict) vs. government intervention. Next month we’ll see a lot of extreme economic data being released. Headlines and social media will be filled with “IT’S THE CRAZIEST SINCE XYZ YEAR!” hype. Comparisons between today vs. 1929, 2008, 1987, or other terrible years will go flying. But personally, I will shy away from making historical comparisons using fundamental data since this recession is not quite the same as other historical recessions.
On that note, let’s look at some various bits of research from people like sentimentrader, who I do think have at least an edge over most of us.
Bad news needs to dissipate
It’s interesting that markets bottomed in September 2001 after “terrorism” news flow dropped by 40 – 50%. In 2008-09, markets bottomed after “foreclosure” and “depression” news flow dropped by around 40%. Below is a chart from Bloomberg that sentimentrader posted today. If you use historic patterns on that newsflow, you can calculate that the number of news stories containing virus notations needs to drop from over 7000 (where it was about 2 weeks ago) to about 4000 stories per day before we see a likely bottom.
Most bear markets don’t finish in 40 days
David Chapman noted in a research note for Enriched that there has only been one bear market that ended in 40 or less days. The current slide started on Feb. 12th of this year and so far has appeared to through the previous week on Monday March 23rd. Thats 40 days. If this was indeed “the bottom”, it would be an outlier. Even 2018’s selloff, which many call a “V” reversal, was not so simple. The SPX peaked in September 2018, fell 400 pts (13%) by November, rallied into early December, then fell another 250 pts to end with a 23% ultimate decline. Frankly, that crash took place within a relatively “safe” economic environment. Yet it still played out as a 2-stage decline.
Let’s look at a few charts from the past few years to spot the patterns over corrective and bear markets in less “safe” environments.
Starting with 2001, note the various markdowns, rallies, then following markdowns. This bear wasn’t a “one & done” bear. Early 2001 saw a rebound with a hammer formation that was a head fake. Another false rally took people out after the 9-11 terrorist attack in late 2001. Not until after 2 rallies, and 45% in total losses, punctuated with the July 2002 hammer, was the selloff over.
Here’s the 2008-2009 picture. Note the 20%/ 300 pt. decline from late 2007 to early 2008, and the ensuing 50% retracement. In fact, there were 3 head-fakes before the ultimate low was seen in March 2009. That was about 50% lower. Long termed chart viewers will note that both market declines began with the same high points on the SPX (around 1550).
Finally, I am not an EWT (Elliott Wave Theorist). But, the 3-wave down principle probably does apply to the above charts. Feel free to draw your own and use fib numbers to help identify those turning spots. As a traditional chartist, I won’t bother trying to spot the 3 waves, but I will note that in the above examples, there were head-fakes.
EWT people talk about declines moving in 3 stages
A (down)-B (rally up)-C (final washout down)
For what it’s worth, perhaps, this rally since March 23rd is the “b” rally wave (head-fake) within the 3-wave sequence. That prognosis would make some sense based on the above 3 examples (the 2018 bear chart wasn’t posted). As such, we may get wave “c” final downturn as the earnings numbers begin in earnest in the second half of April. I noted that on my last blog. Or not. Remember, I don’t trust any opinion out there, including my own. As such, I remain open to all possibilities, and willing to change our plan as is needed. You should too.
Here’s what the investing pros are buying amid the coronavirus volatility
Click here for a National Post interview with Keith Richards
Final thought
A client sent me this technical analysis of the virus spread. Very interesting, and worth a look.
Stay safe!
31 Comments
Hi can’t imagine what the market will look like when companies report first quarter 2020 earnings/losses in April, 2020. Perhaps this bad news will lead to a further sell-off if the pandemic is still not under control in the USA?
Yes, that’s what I am considering….
Even though I have made mistakes on the way down I still have a large cash component, thank you for your guidance on that. I have found in earlier corrections/recessions that the hardest part of holding cash is when and where to deploy it. I believe that you are spot on with the Elliot wave and also in the analysis of past correction/recession patterns.
thanks Gene!
I find this whole market far more interesting holding only 42% equities vs. say 80% or higher equities. Thanks Keith for all the posts. I thought I missed this market with that head fake last week, but I am looking for a new low, then will feed some money in.
Figures can lie and liars can figure. Given the draconian measures imposed on our society, we need to ask tougher questions of our government. The infection rate of tested patients is about 3%. The death rate of those testing positive is extremely low. They usually have multiple ailments any of which could be the cause of death. To my read most people recover quickly. Look for the analysis of Dr Wolfgang Wodarg. A good watch on this subject in the U.K. is David Icke who credibly contends that there is nothing abnormal here. On his website, you will also find a link to a German video showing Berlin emergency wards empty. There is a lengthy video of German doctors questioning the the death statistics in Europe. Another good read is an article by Stanford University, Dr. Bendavid and Dr. Bhattachary “Is the Coronavirus as Deadly as They Say?”
I suspect in the coming days the narrative will be something like “Because of the strong action we took the crisis we invented is over” . After which they will load the market with funny money. Technical analysis really is trend following and not fundamental analysis. The fundamentals would probably not have the market this expensive.
Be safe. Be sober. Think for yourself. Read widely. Ask tougher questions. The SNC-Lavalin affairs shows our government is capable of lying and throwing out truth tellers.
Wow–thanks Bert. This comment caused me to pause a bit…
This will go down as the biggest snow job in history. I live in a city of 75k. 5 positive tests. 0 deaths. They put up 2 tents outside the hospital to deal with the pandemic. The media had an ask the mayor a question event. They declined to answer any of mine. Indulge me to ask them here.
1)What is the daily death rate in the province and has it changed in the last month?
2)What percentage of positive test patients is admitted to hospital and what is the duration of their stay?
3)Of people who have symptoms, what is the severity and duration?
4)What is the average daily traffic in the emergency ward at this time of year and has it increased in the last month?
5)What percentage of deaths in the province have other existing conditions contributing to death?
6)What is the average age of death in the province with Coronavirus?
7)Are most of the Coronavirus deaths occurring in nursing homes or the hospital?
8)Coronavirus is pretty common. Do you think 3% positive is normal or abnormal. Dr Wolfgang Wodarg has a strong opinion.
9)What is the daily number of deaths in the province due to medical malpractice? We need a comparison. (In the U.S. is 270 per day)
The bigger the lie the more people will believe it.
P.S. Any maternity related stocks on your watch list for the fall?
Bert, tell that to the 10,000 Italians and 9,000 Spaniards that have died in the last 6 weeks.
Rick-I wonder (and this is just me thinking out loud) WHY they’ve had such a bad go of it. Something I read today said that 26% of all deaths from the virus were connected to people who smoked. This makes sense–the virus affects your lungs, you’ve been pounding your lungs with self-imposed pollution 12 times a day for years on end….logical that smokers have a greater risk.
From what I understand the population of Italy (perhaps Spain too…) has an average smoking rate that is higher than other countries. And the age factor.
Again, this is just me thinking out loud.
It is not I questioning the stats but German doctors. Many of the ill have multiple diseases of which corona is one. They are alleging that any one of the diseases or combination of is the cause of death. The propagandists say only the virus is the cause.
“SOME PEOPLE BUY STOCKS WHEN THEY HAVE MONEY. SOME PEOPLE SELL STOCKS WHEN THEY NEED MONEY. AND OTHERS USE FAR MORE SOPHISTICATED METHODS.”
MARIAN MCCLELLAND
(LATE MOTHER OF TOM MCCLELLAND)
EXCERPTS FROM STOCKCHARTS.
Agree with Bert on some points. Mortality rates are unknown yet from this virus but research that I have read (https://wwwnc.cdc.gov/eid/article/26/6/20-0320_article) suggests 3% or less which is about normal for seasonal flu viruses in a bad year. Subtract from this how many lives are saved from our lack of driving, and other activities we are not taking part in, add to this suicides from economic fallout, etc… There are consequences of everything we do here. One difference we face is how contagious this virus is. The real unknown is the toll this situation takes on our economy. The health issue may disappear as Bert suggests but our economy will take longer. Think for our selves and listen to Keith. 🙂
Thanks Terry
The economy will suffer. The Fed money supply policies drives the market not the economy.
Hello Keith,
I really enjoy seeing our comments.
I cannot help but notice, everywhere I go, everyone is ‘social distancing” especially as I go shopping and walking through my neighborhood. The word is out, and people are taking it seriously, which I think is very positive. In Ontario, they are looking at opening up the schools again around May 4, which means businesses will be permitted to open as well. I think as we get closer to this date (and in the U.S as well) the markets will begin moving upwards in anticipation of a more ‘normal’ daily life.
Personally, I am really getting tired of hearing about the Coronavirus by family, friends, and t.v. I have decided to tune out. Yes, I am social distancing and doing everything I can to stay safe, and looking out for others as well. Yet, I believe my sentiment is starting to be shared by others. I am done hearing about this virus.
Markets will resume their upward trend before people realize it…If your waiting to read things are better in the newspaper, it will be too late to jump in the market. I did notice today the markets fell (S&P500 – 4.41%) the volumes were light, which to me is a positive sign.
Thanks Ray! There are some who say that the cure is worse than the illness.
Also–more people don’t get any more sick than a mild flu than the small number of people who die from this.
So I tend to wonder if it’s overkill.
I posted 2 weeks ago this article and things haven’t change.
https://slate.com/technology/2020/03/coronavirus-mortality-rate-lower-than-we-think.html
We closed everything to spare our healthcare system from a tsunami, period.
Your mother may die from the coronavirus but the workforce won’t.
As an emergency physician I am very please of the current situation, so I can still treat your trauma, MI or stroke despite the outbreak.
As an investor, I don’t like what is happening but I will stick to the charts, read Keith’s blog and pray that all that money created, the derivatives etc do not bring a catastrophic chaos everywhere.
Thanks Martin. Good comment and thank you for being one of the guys fighting from the trenches.
Just read today that a bunch of UK banks cut or halted dividends. I dont know too much about UK vs CDN banks. Anyone think CDN banks will be following their UK counterparts?
I asked this very question to Craig (our CFA)–his response was that it would take much longer than this before such a cut.
Mike Pence said today that the U.S. appears to be on the same trajectory as Italy. That is not good.
A thousand+ deaths a day will paralyze the U.S. for the next few months and dominate the headlines. This will not be over by early May or early June. The virus may return in the fall. Just the possibility of that will frighten people. I think that many people are going to be afraid, rightly or wrongly, for the next several months. It may not be rational, but when people are afraid they do not spend money. I know that there will eventually be a recovery and that the market will anticipate it several months in advance, but I do not see how you get a V shaped economic recovery out of this.
And now the death cross has occured 50 day is under the 200 day on the SPX
Hey–a technical comment! Thanks Dave!!
Oh I definitely think it’s overkill. I read in Italy because those that died had other conditions they are not even certain that covid was the cause of death but they put covid down anyway as the cause of death. The incomplete and misleading data set has allowed the media to create an incredible amount of hysteria that our governments and apparently medical professionals have bought into
Have a look a this article
https://www.realclearpolitics.com/video/2020/03/12/limbaugh_remember_the_swine_flu_panic_60_million_americans_infected_300000_hospitalized.html
There is a lot of misinformation on the internet & there are a lot of people in this world who knowingly & unknowingly love spreading that misinformation. Quite frankly I wanted to write a tome here but I know that is not what this blog is for. But I will ask Bert this ” Does he think the dotors and nurses around the world are TERRIFIED of running out of protective gear because they are just uneducated trouble makers?” I suggest anyone who thinks this virus is a ruse watch this video by a prominent and super-smart “medical detective” on how we got into this mess – it is 90 minutes of education and yes Bert you should watch it. https://www.youtube.com/watch?v=E3URhJx0NSw
that is the reason we have some bonds in our portfolio especially in the RRSP
but they have been hit too! even the Real estate ETF has gone down alot
other than the banks and the utilities and Telco, i wonder which sector might cut the dividends
(other than oil and gas), are the real estate ETF, XRE, ZRE immune from dividend cuts in a bear market that lasts 12-18 months or more ?
I do think that most real estate (REITs) need to be examined closely. Commercial lenders are now under the gun to reduce or eliminate their rent–thus spanking their income flow. For how long? Who knows? But you have to think that dividends will be cut if it goes for too long…..
Keith while I understand you don’t have a lot of faith in the EWT, I wonder if when the various recessionary wave trends and climb outs are all compared, there would be any sort of marked difference in steepness in either direction between human only vs those heavily influenced by algorithm trading?
My thought being going back as far as decently accurate trading records have been kept to current. I wonder if algorithms are whipsawing the markets despite the ‘breakers’.
Excellent question Mike. I think there is no doubt that the algo’s influence the time and rapidity of movements. I believe that human beings still influence the larger trends. Algo’s are in-out-in-out –so they have less influence over time–just the speed and pitch of the move. For example, a simple algo might react to news headlines. Or to a moving average cross. Boom….they move in or out dependant on the signal. Then, boom..they cover. That’s my thoughts – so the social-psychology principle of EWT remains–that is, each wave represents a phase in human response. My respect of EWT lies in that usage–getting a flavor for where we are in the cycle based on typical human behaviour. I do not believe that fib. numbers are too useful, and I don’t believe you can be too accurate with predicting turning points etc with EWT. Just a background map of where you are, not a close-up street map.