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The S&P 500/SPX (SP500) has appreciated by roughly 20% since I mentioned that a short-term bottom in stocks was likely in. In addition to introducing a watch/buy list of 50 stocks, I also identified the recent short-term bottom in group chat about a week ago, putting emphasis on deeply oversold names like Boeing (BA), defense contractors, and stock markets in general.

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Good News, Bad News

The good news is that many stocks on our watch/buy list moved up by 30,40, 50% or more in recent sessions. However, the bad news is that this short-term rally may be coming to an end.

SPX 1-Year Chart

S&P 500 chart


The reasons why we got this extremely sharp countertrend rally appear quite clear:

  • First, stocks were deeply oversold. It’s unprecedented to see major averages drop from the top in a bull market by 35 or 40% in a month or so.
  • Second, we received huge, like never before seen monetary and fiscal stimuli from the Fed and the U.S. government.

Coronavirus Trumps All

Nevertheless, the ongoing global coronavirus pandemic coupled with the unparalleled global economic standstill trump everything in my view. We are still in the early stages of this battle with the virus, and there is a lot of horrid news ahead. The Fed cannot simply introduce trillions of dollars and quickly fix the global economy, thus, I don’t think that we’ve seen the bottom to this bear market yet.

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In fact, the bottom could be quite a bit lower from here and lower than the 2,200 SPX low as well. Therefore, I am using this opportunity to sell into recent strength. It is quarter rebalancing time, and it seems like stocks could go lower from here. Also, it is very unlikely in my view that the recent bear market will be over just like that, in about 5 weeks or so, because the Fed is throwing an unprecedented amount of money at the problem.

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Should We Thank The Fed?

Perhaps we should thank the Fed for the endless money printing operation that will likely at least double the Fed’s balance sheet going forward, because where would markets be without it. Without the seemingly limitless backstop for governments and large corporations, extremely low interest rates, $2 trillion fiscal stimulus, and other initiatives made possible by the Fed, the SPX would likely be down by 50% or more right now.

Instead, the S&P 500 is down by just around 22%. Still, these are unprecedented times, and it is unlikely that the Fed can simply fix “everything” by throwing endless money at the current economic problem.

Furthermore, Fed actions could lead to some very unpleasant unintended consequences such as very high inflation, an increasingly weaker dollar, enormously high government and corporate debt, as well as extremely low future economic growth.

Fed printingImage Source

Naturally a doubling of the Fed’s balance sheet should dramatically increase the monetary base. This will very likely create quite a bit of inflation going forward as well as weaken the dollar against certain currencies. Furthermore, as the Fed was not able to significantly unload its balance sheet following the 2008 crisis, there is no reason to presume that it will be able to do so following this crisis.

In fact, we are likely entering a “new normal” where zero or near zero rates coupled with additional monetary stimulus will be required to produce even very low 1-2% GDP growth in the U.S. economy. It is much about the debt, as the U.S. national debt is so high (109% debt to GDP) that it is going to be exceedingly difficult to see any growth in the U.S. economy under “normalized” conditions.

Let’s not forget that we have not even begun to see the ramifications for the global economy. We could see 30% unemployment in the U.S. in the months ahead. Consumer spending is going to crash. We are clearly going into a recession, hopefully not a depression, although there is so much uncertainty due to the coronavirus spread that anything is possible.

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Image SourceAlso, I want to draw readers’ attention to the alarmingly high death rate of 19% in closed cases. This is much higher than the 1-2% or 3-4% mortality rate we hear and see about in many sources.

Let’s Focus on What is Probable

In my view, it is probable that the situation with the virus is going to get worse in the U.S. as well as around the globe and it could take several months if not longer to get this extremely contagious pandemic under control. Moreover, it is unclear when or where secondary waves could occur and what kind of impact they will have on the economy.

Will this shutdown last for another month? Two months? Three? Will there be other shutdowns in the fall? Winter? How about next year? All of this is unclear, but plausible. What is clear in my view is that corporate profits are going to get slammed. We are going to see an earnings depression like nothing we’ve seen in at least 11/12 years, possibly worse.

Therefore, yes, I believe now is a good time to reduce positions in stocks, hedge, diversify into gold, and digital assets, and possibly even short the market, because SPX and stocks in general have the potential to go much lower from here.

Technical View

Right now SPX is battling to breakout above 2,650 resistance. If it can manage to do so, stocks will likely extend gains to around the 2,700-2,750, which was the initial top-end range for the current bear market rebound. However, if 2,650 and then 2,700 cannot be penetrated, look for initial support at around 2,550-2,500, then at the 2,300-2,200 point, then at 2K, and finally at around the 1,800-1,600 level.

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The Bottom Line

We’re doing end of quarter rebalancing and stock positions are being reduced essentially across the board right now. With WTIC oil likely going below $20, I don’t see much of an advantage to have holdings in anything but a few greatly oversold energy names.

Also, with corporate profits likely to continue their decline in future months due to coronavirus shutdowns, many stock segments will be reduced. I see potential in the gold, silver, mining/GSM space, bond instruments such as TLT and others alike, as well as in some digital assets due to unprecedented central bank easing in the U.S. and around the globe. I even see a better opportunity to be in cash right now than in stocks as cash reserves can be deployed to buy stocks at lower levels. Generally, I expect that the SPX can fall to at least the 2,000, but likely lower. I expect a true bottom to be attained at roughly the 1,600-1,800, possibly lower if stocks overshoot to the downside due to continued coronavirus disruptions.

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Disclosure: I am/we are long TLT, GOLD, SILVER, MINERS AND OTHER ASSETS NOT MENTIONED IN THIS ARTICLE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article expresses solely my opinions, is produced for informational purposes only and is not a recommendation to buy or sell any securities. Please always conduct your own research before making any investment decisions.