In the past week, the S&P 500 has seen a recovery of 20.4% to close yesterday at 2626 from the steep selloff which began February 17th from the all-time high of 3393, to a temporary bottom of 2191.86. Based on my 24 years of analyzing the S&P 500 index, I know that investors who want to protect themselves from further losses need to pay attention right now. Yesterday’s closing level of 2164 in the S&P 500 represents a pullback from the all-time high of just -23%, hardly enough one could easily argue, compared to the currently estimated virus triggered declines in U.S. GDP of 5% in Q1 and 14% in Q2. By comparison the last “correction” on the S&P occurred during October 2018 when the S&P fell from 2943 to 2346, or -26%. The October 2018 correction was quick, short, and based on a temporary and mild interruption in consumer confidence. So, if you believe yesterday’s S&P price level of 2626 is going to last, then you’re implicitly assuming things are better for the US economy now than they were in November 2018. Obviously, this couldn’t be further from the truth. The Virus has decimated a vast array of businesses and industry’s here in the U.S. over the past month and likely for months to continue. The worst of stock market losses is yet to come.
My analysis of the S&P 500 index indicates the recent bear market recovery/rally is likely to top out at 2664; and that is only if the market reaches 2664. I build standard deviations into all of my models and yesterday’s close of 2626 falls within the margin of error. The standard deviation works both ways so the market could exceed 2664 to approximately a max level of 2743 before violently reversing. In other words, it’s time to hedge your exposure or sell if you want to avoid the next wave of losses. At the current level, the combined economic effects of the shutdown in businesses, stalled economic activity and unprecedented layoffs, will push markets to new lows. One trigger that would initiate the selling is the ISM Manufacturing Index report tomorrow, Wednesday, March 1. The ISM will present some of the data on the true economic decimation we as an economy are experiencing.
The reality of the dire impact of the Virus will begin to flow in the form of data as scheduled below:
Wed Apr. 1: ISM Manufacturing Index (March)
Thu Apr. 2: Weekly Jobless Claims (3/28)
Fri. Apr. 3: ISM Non-manufacturing Index & Markit Services PMI (March)
Wed. Apr. 8: FOMC minutes
Thu. Apr. 9: Weekly Jobless Claims (Apr. 5), PPI (March), Consumer Sentiment (April)
Fri. Apr. 10: CPI (March)
These data over the next two weeks will punish markets. You should be ready with a plan of action.
Prudent investors should consider:
- Hedging their portfolios from further downside in equities
- Moving to cash
- Preparing for a further loss, at a minimum, to an extent the S&P 500 retests its recent low. More realistically the S&P 500 will reach 1800 for a full correction of 46.95% from its all time high. This would coincide with the Dow Jones Industrial Average (DJIA) reaching the 15000 level, for a similar retrenchment from peak to trough.
Very basic technical analysis can give valuable guidance as to how oversold markets are, and whether further breakdowns are at hand. In this mode of assessment, I have applied 50% Fibonacci retracement levels on recent price history of the S&P 500 index, to estimate a likely path for the index in the very near future.
The chart shows the high of the most recent range starting at 3136.72 and progressively declining to the recent bottom of 2191.86 before the start of the bear market rally. A 50% retracement of this range suggests the index should rally to the 2664 level and then reverse course to resume a giveback of its gains.
This approach at estimation is extremely accurate on the S&P 500, particularly when the market is under duress. It signaled precisely the retracement of the previous range as the S&P 500 trended down from its 52-week high of 3393.52 to 2855.5 where the index had its first short-lived relief rally. In this case, the S&P 500 rallied to its mid-point of the range to 3136.72 shown on the chart.
This retracement study is one example among many trading strategies used by Hercules Investments, in all of our actively managed portfolios. Leveraging such approaches to investment management, along with additional quantitative methods, ensures that portfolios are protected in these uncertain and volatile markets. In addition to protecting investor’s portfolios using technical analysis, there are also many ways to profit from the anticipated market decline. Purchasing Put options on the S&P 500 via the CBOE (Chicago Board Options Exchange), or purchasing inverse ETFs focused on the index or sectors within it are two basic examples.
You do not have to suffer additional losses. Be proactive and reach out to an expert in portfolio risk hedging, or simply reduce your exposure. 2664 is just a few points away, and we may have already come close enough to initiate selling. Think about it and take action before the ISM report Wednesday, April 1 at 10AM EST. This is no April Fool’s joke.
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