Based in Kingsport, TN
In Search of a Coronavirus Stock Market Bottom…
While examining the current situation in the stock market, we must look at the past for guidance, which is why much of our work involves Quantitative Analysis.
Looking at the current decline, there really is nothing like it except the Crash of 1987, which has many similarities. The reason we cannot really compare it to 2008, 9/11, 2002, and 1931 is because those time frames took place in an already occurring Secular Bear Market. Time periods such as 1965-1982, 2000-2013, and 1929-1954 are called Secular Bear Markets, when the stock market has wild swings for many years but goes nowhere until it’s over.
When the 1987 Crash occurred (see chart below), we were already in a strong Secular Bull Market, which is a long period of time when the equities markets are rising and making new highs, such as 1982-2000 and 2013-Present. Therefore, comparing the 1987 Crash to the 2020 Coronavirus Crash seems like the best course of action until something changes.
Declines in the stock market often follow certain Fibonacci Retracements, a method of technical analysis for determining support and resistance levels. In fact, in a Stock Market ALERT we sent during the December 2018 crash, we used these retracements to find that bottom, and even used Apple, Inc as a reference, which we will also do here.
Fibonacci Retracements (pullbacks) often occur at the 38.2%, 50% and 61.8% levels. In the Dow Jones chart below, we took the lows of the previous Secular Bear Market (1974) and when we measured the retracement of the 1987 Crash it represented a 50% retracement, which is common.
During the declines yesterday, the Dow Jones touched the low 18000’s and bounced off the 50% retracement as measured from the low of the previous Secular Bear Market (2008).
Another compelling argument that a bottom has been seen, are the fear levels measured by the VIX and VXO volatility indexes. They show fear levels at even higher levels than the 87’ and 2008 crashes. Ironically, fear is fuel for the stock market during massive declines marking significant stock market bottoms of the past.
If we have already hit bottom, it’s common to retest it down the road for one final scare, but it’s possible the worst could be over. Remember, the stock market is a leading indicator by 6-12 months, as any bad future economic news for example, could be already priced in.
Dow Jones Industrial Average-75 Year Chart
&
Apple 20 Year Chart
Yesterday’s stock market declines also took Apple down to a 61.8% retracement from the previous lows, the maximum Fibonacci Retracement during uptrends, same as it did the last 2 declines. This is more evidence that the worst could be over. After all, it was Apple that helped us find the end of the 2018 decline, mentioned in a December 2018 Stock Market Alert.
Summary
Potentially, this is good news for the stock market overall, and a significant bottom may have been seen during yesterday’s declines, but of course no guarantees.
Stay tuned…
Written by Craig Dillon
– President
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