Why we have likely seen the bottom of the Corona crash in the US stock market

Stock mar­ket fore­cast­ing is not an “exact sci­ence” (as if some­thing of the sort exist­ed out­side of the sci­ence of log­ic). That said, the intu­ition of the logi­cian with 23 years of mar­ket expe­ri­ence screams: “This was the bot­tom!” Let’s see what may be behind this intuition.

First, as far as I can see, every­one is pan­ick­ing. “Panic” con­tains “Pan”, the name of the ancient Greek god of the woods who instilled fear in peo­ple for no good rea­son. Or rather, for an entire­ly “gen­er­al” (“pan-“), unde­fined and there­fore non-rea­son (it is always a good idea to con­sid­er the ety­mol­o­gy of a giv­en term of inter­est, because often this ety­mol­o­gy does con­vey exact­ly the log­ic you would expect it to con­vey, giv­en its own ety­mo-log-y; the “ety­mo” part out­right means “true sense” in ancient Greek). If every­one around you is pan­ick­ing and no longer look­ing at things in a relaxed and ratio­nal way, this is the time to buy stocks (or to sell, for that mat­ter, in the case of a buy­ing pan­ic). When log­i­cal think­ing stops, illog­ic ensues, eval­u­a­tion errs, and mis­pric­ing occurs, name­ly in the direc­tion of the emo­tion that defines the respec­tive pan­ic. Logic dic­tates that in a pan­ic it must be prof­itable to take a posi­tion in the oppo­site direc­tion. – Why we our­selves could not be more relaxed with regard to COVID-19 as regards our per­son­al health, we have explained in some detail in our arti­cle “The log­ic of sur­viv­ing the Coronavirus pan­dem­ic”, in which we draw the log­i­cal con­clu­sions from the most recent sci­en­tif­ic evi­dence as to what every­one can do to effec­tive­ly pro­tect him­self against the infec­tion with fair­ly sim­ple means (we strong­ly rec­om­mend you read it, includ­ing the updates at the bot­tom of the arti­cle regard­ing the stud­ies from Hong Kong and China). There is more in the works here at loico with regard to how the COVID-19 emer­gency can be mas­tered more effec­tive­ly from a med­ical point of view, so stay tuned.

Second, as pan­ic can last longer than for just a short peri­od of time, mean­ing you can be too ear­ly if you rely on its mere pres­ence alone, con­sid­er that the S&P 500 just crashed into the 38,2 % Fibonacci retrace­ment of its decade-long ascent that I pre­dict­ed on February 4, 2009, a month ahead of the actu­al turn­ing point in the mar­ket (Frankfurter Allgemeine Zeitung, search your Email archive, you did not pub­lish my arti­cle to the effect that I offered you then, but maybe com­pli­ance rules bring it about that you still have it). So we have not just tepid­ly touched the retrace­ment lev­el, we are in the process of crash-test­ing it. We will delve into the log­ic of the Fibonacci num­ber row anoth­er time, but it is essen­tial­ly a quan­ti­ta­tive form of qual­i­ta­tive log­ic. – Buying pan­ic, just to men­tion it, had con­tin­ued to lift the S&P 500 up, to exact­ly the price tar­get of 3390 points that could be derived from tech­ni­cal analy­sis (it hit 3393), all the while the Coronavirus cri­sis was at least to be feared to be devel­op­ing. The sig­nif­i­cant mar­ket cor­rec­tion after reach­ing a clear­ly longer-term price tar­get, the fact that it occurred at all, had exact­ly noth­ing to do with COVID-19 what­so­ev­er. The veloc­i­ty of the cor­rec­tion, of course, does.

Third, evi­dence shows, and every expe­ri­enced trad­er knows, that the mar­ket could not care less about eco­nom­ic data, or any data, for that mat­ter, that is a func­tion of some­thing which “has been” or “is”. The mar­ket cares about one thing only: the future. Which is only log­i­cal: The mar­ket exists to price future cash flows; those cash flows depend on the actions tak­en by human beings; and those actions ini­ti­ate in human minds. The mar­ket is all about what peo­ple think will hap­pen and what they intend – and feel con­fi­dent – to do in the future, not about what they have done or are cur­rent­ly doing.

Fourth: If this view seems at odds with mar­ket behav­ior seen dur­ing the last few weeks (where what is clear now was essen­tial­ly equal­ly clear then), it isn’t. For if we sup­pose that the mar­ket always runs, as it does, ahead of “real” world devel­op­ments (in case it does indeed “run” instead of sim­ply oscil­lat­ing because unsure of “what to make of things”), then, being the “uncon­scious”, uncon­trolled chaot­ic being that it is (a col­lec­tive, sub­con­scious mind), it can log­i­cal­ly only do so if it to some extent exag­ger­ates the real world devel­op­ments it ini­tial­ly runs ahead of. This momen­tous nature allows the mar­ket to “mechan­i­cal­ly” run ahead of what hap­pens in the real world. It “ini­tial­ly” pre­cedes, because finan­cial mar­kets are about future cash flows, cash flows that are at first only imag­ined, ide­al­ly with some sound log­i­cal ingre­di­ents to the imag­i­na­tion (we talk about this rela­tion­ship in our “Welcome” text). The mar­ket then exag­ger­ates, because imag­i­na­tion ever too often extrap­o­lates cur­rent devel­op­ments to illog­i­cal extremes, allow­ing the mar­ket to pre­cede again by “bounc­ing back”, either from being “too high” or “too low”. Whoever wish­es to be spared harm from this kind of mech­a­nism, needs to rise, in accor­dance with loico’s mot­to, “beyond imagination”.

Fifth: Since we at loico esti­mate that effec­tive sat­u­ra­tion by COVID-19 in the worst-hit coun­try, Italy, will occur some­time around the end of April; since new case as well as death num­bers there have start­ed to decline; since the United States’ pres­i­dent has now stat­ed he intends to reopen the coun­try in less than three months, and since expe­ri­ence shows that the mar­ket typ­i­cal­ly runs ahead by sev­er­al, some­times even by quite a num­ber of months, this, right now, would appear as a per­fect time for the mar­ket to “look ahead”.

Sixth: As I stat­ed back in 2009, what we were about to see then was the start of the upswing phase of the fifth Kondratieff cycle (we will write about our gen­er­al eco­nom­ic the­o­ry in depth at a lat­er time). This under­ly­ing upswing phase, much cor­rupt­ed by pol­i­tics but not entire­ly under pol­i­tics’ con­trol, is about to run for about anoth­er six to sev­en years. So this, right now, COVID-19 or not, is just a bit too ear­ly in the cycle to attempt at a replay of the Great Depression.

Of course, there are many more things that run through the head of a trad­er who has seen a bit or two hap­pen­ing in finan­cial mar­kets. Such as the market’s utter fail­ure, upon tru­ly seri­ous attempts, to deci­sive­ly cross in any sus­tained way the low­er, sup­port­ing line of the falling wedge the S&P 500 futures had formed over the last 10 trad­ing days on an hourly basis, indi­cat­ing that the bears have exhaust­ed them­selves, and so on. After all, as I said, this is an intu­ition. But a strong one, informed by the log­ic of the mat­ter as I see it, prompt­ing me to buy into the ES futures yes­ter­day late in the trad­ing session.

“Bottom”, to clar­i­fy, does not mean that the low the S&P 500 put in yes­ter­day at 2192 points will not be retest­ed. It could very well be. But the bot­tom that I assume we have seen should sim­ply not fall out. In case I am wrong, blame it on me. In case I am right, the mer­it is logic’s alone.

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Logic is all about relating individual pieces of information in a consistent way. “Consistent” means non-contradictory. An apparent tendency of two pieces of information to appear inconsistent calls for express differentiating clarification, with the logically required depth of differentiating discussion depending on the extent to which both pieces of information appear similar.
We had expressed ourselves confident to be able to predict the outcome of the 2020 US presidential election with a high degree of confidence based on financial market behavior. What we figured out – with the highest degree of confidence – was that we were maximally uncertain about the outcome (keeping us in silent consternation). Which in hindsight would appear exactly as the correct assessment to have been made.

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Logic is all about relating individual pieces of information in a consistent way. “Consistent” means non-contradictory. An apparent tendency of two pieces of information to appear inconsistent calls for express differentiating clarification, with the logically required depth of differentiating discussion depending on the extent to which both pieces of information appear similar.
We had expressed ourselves confident to be able to predict the outcome of the 2020 US presidential election with a high degree of confidence based on financial market behavior. What we figured out – with the highest degree of confidence – was that we were maximally uncertain about the outcome (keeping us in silent consternation). Which in hindsight would appear exactly as the correct assessment to have been made.
An Egyptian man takes a hostage at knifepoint in the Milan cathedral, threatening to slit his victim’s throat. A once reputable Italian paper tells its readers that police “convinced him to lay down his weapon and release the hostage”, when in fact, for everyone to see on video, police had to forcefully overwhelm him. The full and unredacted video, in turn, explodes on social media.