WILL CORONAVIRUS CRASH THE STOCK MARKET IN 2020?
Will the Coronavirus Crash the Stock Market in 2020? People are panicking over the worldwide spread of the virus, but cooler heads will prevail. The week of February 2020 was one of the worst weeks of selling pressure on record for the DOW and SPY. Lets get our heads screwed on right and cover the important things you need to know about this situation. What are the signals to look for hints of future market direction?
VIDEO UPDATED 3-12-20
First off lets talk about the the charts. The charts were showing a correction was overdue. What's a market correction? The exact definition is when the stock market pulls back 10-20%. Corrections are usually very fast, fierce and scary. That's what we are seeing play out on the charts in March.
As we can see above, this week we dropped below the 200SMA (blue line) on the weekly chart, on increased selling pressure. There is also a huge weekly trend line out there that is acting as support in this zone. These are both signals that traders use to spot buying opportunities and reversals. It's too soon to tell, and a bit risky to catch the knife here. We'll explain why below. Charting platform is TrendSpider.
Have Past Epidemics Caused Stock Market Crashes?
- They have certainty had some affect on the markets, but lets look at the historical data as a whole. The majority of times that major diseases or viruses spread, the market has survived, fared well or even prospered.
- Check out the chart below from the Dow Jones market data. As you'll see the results are fairly mixed, but it certainty isn't a given that a pandemic or epidemic causes a market correction, bear market, or recession. There is more we need to look at then just the potential virus alone.
What Makes a Stock Market Crash?
- There are many factors that can cause it, but usually some or all of the following factors occur to cause a stock market crash:
A very long bull market with rising prices and extreme economic optimism. Another is where price to earnings ratios (PE Ratios) exceed long-term averages, and last but not least, over leveraged market participants using margin.
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1. Optimism. Are Currently in the Longest Bull Market Phase of All Time.
The latest bull market began its life in March 2009. Recently we retested, broke, and fell back through the 2009 angular resistance on high volume. Check out the chart below. Are we beginning to top on the markets? Potentially. Has the pattern that has developed since the 2009 bottom, and the 2018 bottom has created the mother of all rising wedge patterns?
During bull market phases, prices love to make rising wedges. And when they break, they simply expand, widen, cup and handle and continue to rise in a wedge. Eventually the wedge grow so large, that it simply cannot hold the pattern anymore. When I begin to see a rising wedge with less than 20% of its pattern left (the empty space left in the wedge) I start looking for the door. I can always buy back in lower on a dip If I am wrong about the wedge. There is always another entry.
Another thing I watch for an end to a trend, is the 9EMA and 50SMA on the weekly charts. Has the 9 crossed over to the downside on the 50? Does it look like it will soon? Is there a potential head and shoulders forming as well? Please note the chart below was created in logarithmic scale. Also you're going to want to check the rising wedge below now.
2. Technical Analysis Works When Done Properly
Recently I made a 60 second video post about the technicals concerning the SP500. A person decided to comment "I love how these guys make these lines mean whatever they want"
It got me thinking how a lot of people will put down anyone who uses technical analysis as part of their strategy. As anyone who puts themselves out to the public knows, there will always be haters. But the charts don't lie. Don't get me wrong, you can be bad at technical analysis just like you can be bad at basketball. But when applied correctly to YOUR specific style of trading or investing, it can be a powerful tool to protect yourself with.
With that being said, you're going to see some charts on this post that are probably unconventional, and may challenge your thinking of technical analysis. Heck, they may outright offend you. Just realize that I am just sharing my perspective and my aim is not to misguide, suggest, influence or control your actions in anyway. In fact, DON'T make any decisions off of one source alone. Do your own research.
Use our real time stock alerts for any long term investments or swing trades.
3. Current Shiller PE Ratio - Worth a Review
- What is the current PE ratio or Shiller PE ratio of the SP500 saying? First lets talk about what the ratio is. It is the cyclically adjusted price-to-earnings ratio commonly known as Shiller PE, CAPE, or the PE 10 ratio. What it does is calculate and apply a valuation measure of the S&P 500. It is typically defined as price divided by the average of ten years of earnings (moving average), and adjusted for inflation. The current ratio as of March 1st 2020 is 28.05
- PE ratios are something investors generally pay attention to during bull and bear market phases. Now, here comes some of that crazy technical analysis I warned you about above. Lets look at our technical analysis of the current PE ratio chart below. We are currently bull flagging, but dealing with a newly created resistance (from the last 20 years). We also have moving averages signalling a pretty serious earning sign, and a we failed to break out of the 1929 PE high. There appears to currently be enough technical headwinds here to generate a risk off scenario for equities unless we can break the 20 year resistance that has developed, as well as the 1929 high zone. Will Coronavirus Crash the Stock Market in 2020? Not alone. In fact, there isn't usually one thing alone that will cause a market to crash.
Also worth noting is last week ( Week ending March 6th) we saw 9 year support broken. Will company earnings continue to drop due to the current situation with the Coronavirus?
Will Coronavirus Crash the Stock Market?
- As you can see, there are so many factors at play right now. Lets look at other indicators that might suggest a bear market, recession, or both is on the horizon. The more investigative research you do, the better. Have you ever forgotten to study for a test and then taken it and failed miserably? It's the same concept here. Be sure to study what the indicators are saying if you want to have the best shot at making the right decision.
1. What You Need to Know About China Now!
There's more worries in China then just the Coronavirus. There was recently released PMI data for February 2020 which shows what is the current status of China's manufacturing industry is in trouble. The numbers were frightening. China’s data on factory activity dived to a new all-time low, worse than during the start of the global financial crisis. Check out the chart below from investing.com
As you can see in the chart above, investors have something to think about. China is the worlds leading manufacturer of computers, plastics, furniture, materials, vehicles, clothing, mechanical and electrical parts and so much more. Is the Corona virus completely responsible for this data - yes and no. The signs were already in place that the global economy was slowing, and the virus tipped it over the edge. What ripple affects will the Chinese export economy have on the global economy? We don't yet know, but it should start to show up in other numbers that investors pay attention to. Make sure to check out our full stock indexes list.
2. 10y Treasury Yield History
What is the 10y treasury yield history saying about the stock market? The benchmark bond yield has been flashing warning signs for awhile now. And in February 2020 it closed the month at all time lows. Typically when treasury yields drop, it is a sign that demand for bonds is increasing and that stocks are less favorable of an asset.
We have heard that the Federal Reserve is considering fixing bond prices...which would be a bold intervention in the bond market. Doing so might be a way to prevent the normal fear that persists during times when yield prices drop to extreme lows.Check out the chart of the 10Y below.
As you can see, the 10y broke a key level of support and has been following the long term trend megaphone or broadening pattern south. While it looks attractive for a reversal setup, I remain cautious as it could take till mid 2021 for the bond yield to stabilize and reverse its current trend. As you know, we are big proponents of not trying to catch the knife, and let others who are braver, or more wealthy go first. Capturing the bulk of the trend is what we want as investors or traders, if we miss the bottom or the top by a little bit, so be it. It's better than feeling the pain of a down trend that hasn't ended yet.
3. Unemployment Numbers in the US
Unemployment is at 50 year lows. Typically, when unemployment is low, it's seen as a good thing for the economy and the stock market as a whole. But of course, we know that economic data domino's don't fall over all at the same time. When things are low, historically low, investors are often prepared for the reversal at any point. Keep your eyes on the chart below for a rounded bottom and for unemployment numbers to increase for signs of a more headwinds.
As we know, all good things must come to an end, and timing is everything. When people who are employed become unemployed, the family loses wages, and the united states as a whole loses their contribution to the economy. That means things like goods or services they provided to the overall health of the economy vanish with their job. Unemployed people also spend less, which can lead to unemployment for other people, creating a domino effect that spills throughout the economy.
4. The Price of Gold
The price of gold has been soaring. Recently breaking 5 year highs. it almost broke 1700 before selling off quite hard. The important thing to know is gold is showing it is in a bull phase that is likely to continue. Look at the chart below. What is it telling us longer term? Would gold be making new highs if everything is "fine"?
Keep in mind there are always stocks that do well during a recession you can look at if we end up going in the recession direction.
Will Coronavirus Crash the Market? Final Thoughts
As we have shown you, there are many straws that could cause the camel to break its back. The important parts about being a smart trader or investor is awareness of the different factors that are at play that could cause markets to experience declining prices.
The Coronavirus is just one element at play and it's important to not get tunnel vision when it comes to trading or investing. As a long time investor and trader myself, every time I review a chart for a trade setup I am always asking myself "What do I not see coming in this scenario?" I then proceed to poke as many holes in my trading plan BEFORE I enter the trade or investment.
If you're looking to learn as much as possible about the charts, you've come to the right place. The Bullish Bears are a pay it forward stock trading service community that teaches stocks, options, futures, and so much more. Will coronavirus crash the stock market? No one knows for sure, but the risk signs are enough to have you paying attention.