feeling for the bottom
panic in the air
During bad markets like the present, company fundamentals tend to go out the window as predictors of short-term stock market performance. What takes their place is varying shades of fear and reading charts.
As for fear, I’ve found in watching my own usually-optimistic behavior, that no matter how far down the market has fallen it isn’t approaching a bottom until I start to get scared–that maybe my innate cheeriness has finally ruined my career and the family finances. For what it’s worth, I started getting these (irrational) feelings for the first time on Wednesday. It could be that my last-minute rush to get my thesis project finished and submitted to SVA contributed a feeling of panic. If not, my Wednesday experience is good news.
charts
My version of William Pitt is to say that charts (not patriotism) are the last refuge of scoundrels. Nevertheless, when rationality flies out the door, charts are what’s left.
In the US, despite the chatter of TV actors, the important index is not the Dow but the S&P 500. The important things to look for, in my view, are past bottoms and places where the index has been flattish for an extended period of time. That’s not a lot to go on but that’s most of what there is.
In this case, the relevant figures I see are 2400, which was the bottom for the mysterious market drop at the end of 2018 and 2100, where the S&P spent much of 2015-16.
Two idiosyncracies of the US market:
–the index often breaks below a big support level–scaring the wits out of traders who see themselves sliding into a yawning abyss, in my view–before reversing itself. The break below signals the bottom
–almost always the index recovers for several weeks before returning to, and bouncing up from, the initial bottom. This didn’t happen in 2018, though.
the economy
My guess is that the worst of the coronavirus will be behind the US by June. If that’s correct, then at some time in May (?) the stock market will begin to discount better times.
The biggest economic negative has come from the White House, where the incompetence of Mr. Trump was on full display, raising echoes of the disaster he created in Puerto Rico earlier in his term. Not far behind is the recent revelation that Republican senators dumped their stock portfolios after coronavirus briefings, while still toeing the party line that there was nothing to worry about. (My view is that Trump has done an enormous amount of long-term economic damage to the US in his presidency so far–hurting most deeply those who have trusted and supported him–but that we have yet to see the negative consequences.) Somehow, Washington appears to have started to function again, however.
On the other hand, state and local officials have negated some of Trump’s “hoax” campaign by acting quickly and decisively.
From a purely stock market view, it seems to me that investors have switched out of panic mode and are beginning to sift through the rubble to sort winners from losers. If I’m correct, it’s important for us as investors to pay attention to what the market is saying now–and ask ourselves how well this matches with our sense of what is happening.