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The chart below of new Covid-19 cases shows that the uptrend that was in place since early March appears to have been violated. That is good news for the human race. Unfortunately, the U.S. economy has been shuttered for weeks and 16 million people lost their jobs in the last 3 weeks. The problem is that we cannot just flip a switch and turn the U.S. economy back on. Also, even though the Federal government has created a massive stimulus package, that too will take time to seep into the economy. Meanwhile, the 1st quarter earnings period begins tomorrow with the JPM and WFC reporting. One can predict a drumbeat of bad news for the next 4 weeks.

Chart 2 below shows that, even after a giant rally, just 15% of the Russell 3000 (98% of publicly traded companies) are trading above the 200DMA. This is a weak technical showing, especially after one of the best weeks for stocks in over 80 years. Chart 2 shows that the percent of Russell 3000 stocks trading below their 200DMA has only been below 15% 8 times in the past 25 years. The recent decline actually put in a number below 5%. There was only one other time that this happened in the past 25 years - during the great recession of 2008.

In the 3/13/20 World Snapshot, TPA looked closely at the history of low extremes for stocks trading below their 200DMA for the Russell 3000. It turns out the big questions is whether or not we are in a 2008-like scenario.

From the 3/13/20 World Snapshot: “TPA then looked at how the Russell 3000 performed in 5 periods following an occurrence of 15% or fewer stocks trading above their 200DMA (5, 10, 20, 30, and 40 days after). That makes 770 measurement periods. Of those 770 periods 351 showed negative performance or 45% of the time. A closer look at the performance numbers, however, shows that 345 of those occurrences or 98% occurred during the 2008-2009 period. There were only 6 negative periods that were not in the 2008-2009 period.

The question clients need to consider is whether or not we now face a 2008-2009 situation. In that period, buying an oversold market was basically a coin toss. If we are not in a 2008-2009 type market, the odds are very good for a rally.”

So, if we are not in a 2008-like situation, we have probably made the cycle lows and we are okay, but if we are in a 2008-like scenario, there is a good chance the blood-letting is not over (data table for the 3/13/20 World Snapshot provided at the bottom of this report).

Chart 2 below shows that in the past 25 years only 2 periods have seen the percent of Russell 3000 stocks trading above their 200DMA drop below 5%; 2008 and 2020. Chart 3 shows that in 2008, the first time the below 5% threshold was reached was NOT the ultimate low for the market. In fact, the lows of for the S&P500 actually occurred a full 5 months after the percent of Russell 3000 stocks above their 200DMA first dropped below the 5% level. Chart 4 shows where we are right now.

Another indicator of which type of situation we now find ourselves is the High Yield Spread. The High Yield Spread looks at the yield premium demanded by investors to buy High Yield Bonds. This is really a measure of risk tolerance. Chart 5 shows that the current High Yield Spread has spiked to a level only seen in 2002 (the end of the 2000 – 2002 bear market) and 2008.

What happens next depends on whether the current situation is a 2008-like situation or not. If it is, we will most likely sell-off again and retest the recent lows. If it is not, we are probably in for a tough slog, but will not see S&P 500 @ 2200 again. The true test in the weeks ahead will most likely be the stock market’s reaction to the inevitable parade of negative news during earnings. If stocks that report, do not fall, but remain stable or rise on bad news, the market will probably be okay from here, but if stocks are not resilient after they tell their sad stories, we may test the S&P500 2180 level again.

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