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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