After Monday’s 12% decline and largest-ever single point daily loss, the S&P 500 Index has now given back all gains since Christmas Eve 2018. The bear market struck quickly, and the selloff is accelerating. Whether the large cap index holds current levels likely determines whether this bear market will be a mild one, or something more malevolent, possibly on par with the 2007-2009 bear market that accompanied the financial crisis.
The flicker of recovery we saw on Friday afternoon now appears evanescent. Stocks are stumbling anew even after Federal Reserve Chairman Jerome Powell announced on Sunday that the central bank is slashing the federal funds rate to a range between 0%-0.25%, and that it was launching a new round of quantitative easing, purchasing up to $500 billion in government bonds, and $200 in mortgage-backed securities.
The market’s foul reaction indicates that the monetary stimulus is not enough to stem the economic effects of the coronavirus contagion, or that the quickness of the Fed in unleashing its arsenal of monetary weapons means the problem is bigger than originally feared.
Stocks have value because of the earning power of the companies in which they represent ownership. Forecasting future revenue and earnings for companies will be foggy for the foreseeable future, as the economic impact of the extreme measures to slow the spread of COVID-19 are without precedent in modern U.S. history. Most economic models have not factored in probabilities of four or five months of social distancing and self-quarantine.
You wouldn’t need much computing power to hazard a good guess that the outcome of almost half a year of virtual shutdown will be a recession. Taken to an extreme, if job losses pile up, debts go unpaid, cars get repossessed, homes are sold at auction, and businesses with big debt loads and no revenue will scramble to keep creditors at bay.
Critical Level for Stocks
After Monday’s thrashing, the S&P 500 is down 29.5% from its closing high of 3,386.15 26 days ago on February 19. According to Stock Trader’s Almanac, bear markets since 1948 have averaged a peak-to-trough decline of 33.1% and lasted a little more than one year (407 days).
The October 1987 crash was not associated with a recession, and the bear market lasted just 101 days, and took the market down 33.5%. The 2007-2009 bear market, which was accompanied by a recession, took the S&P 500 down 56.8% at its low on March 9, 2009, 517 days after the prior peak on October 9, 2007.
At its 2386.13, the S&P 500 is dances at the point of a potential rebound, or on the precipice of the abyss of a 2007-2009 style bear market. A four-year weekly chart shows the S&P 500 last week slicing through its 200-week (4-year) moving average, a trend line that had supported stocks on previous pullbacks in December 2018 and February 2016. It’s also the level that launched an 18-month rally in March 2017.
If the S&P 500 fails to hold 2350, it could be a quick trip to 2100, and possibly the 1810 February … [+]
With the 200-week average pierced, the support level to watch now is 2350 at the lows of December 2018. This is a drop of less than 5% from current levels. If this level holds, a powerful rally may develop because of the deeply oversold market, shown by the RSI on the top of the chart.
If the 2350-level is breached, the next apparent level of support would be at 2100, which would be a 38% decline from the highs. If 2100 fails to hold, the next stop would be the February 2016 bottom, when the S&P 500 closed as low as 1810. If the index were to fall to this level, the decline from last month’s all-time high would be 46.5%.