Waiting for the Other Shoe to Drop (see my update below)

Investors who think the worst is over had better prepare for the other shoe to drop. Stocks rallied sharply last week, reflecting the egregious miscalculation not only of bulls who have yet to meet a dip they did not like, but also of bears who evidently fear that the crazed buying binge will continue for no good reason. They should relax, since there has never been an instance where an initial drop of 30% in the stock market did not take at least another six months to bottom.

Another reason why bears shouldn’t panic to get ’em back is that in bear markets, shares tend to fall by as much as earnings. Assuming that the bottom line is halved over the next six to nine months for S&P 500 companies — a very conservative estimate, considering the number of businesses that are either headed into bankruptcy or shuttered indefinitely —  the S&P 500 should eventually fall to at least 1700. That is miles below the current 2789, and 22% lower than the March 23 crash-landing bottom.

AAPL Is Key, as Always

As always, we’ll be keeping a close eye on AAPL, the most popular stock in the portfolio world and a reliable bellwether for the stock market in good times or bad. Short-covering nuttiness has pushed the stock as high as 271.70 so far, but you should expect the rally to hit a minimum 282.45, an important Hidden Pivot resistance, before it sputters out. A commensurate target for the E-Mini S&P lies at 2881, exactly 94 points above Friday’s close. Enjoy the rally while it lasts, but don’t get too caught up in the idea that we are seeing the V-shaped bottom that many financial advisers have told their clients they can count on.

Although we often ascribe prescience to the stock market, it is actually as dumb as a fence post. It doesn’t know much more than you or I about the pandemic and its future consequences, and there are therefore far too many big uncertainties for a sustained rally. Keep in mind as well that if the E-Mini S&Ps achieve the 2881 target noted above, they would be  trading just 15% below their all-time highs.  Considering the extent of the damage that has befallen mankind and the global economy, it seems extremely improbable that a 15% haircut would set valuations right. It were as though we’d suffered but a relative moment of pain for a catastrophe that will forever change the way we live and conduct business. _______ UPDATE (Apr 13, 10:30 p.m.): With the Dow off by 328 points, Buffett and DaBoyz still managed to squeeze AAPL shorts for a $6 gain. The 282.45 rally target is still in no doubt, nor is this stock’s ability to at least briefly drag the entire world’s stock indexes higher.

  • RedWillDanaher April 13, 2020, 9:22 am

    Hi Rick, I’m guessing we’ll see an explain it all away attempt that sounds a little bit like this: “Yes, earnings have been halved, but this is the result of a ONE TIME shock and we expect to return to prior levels of profit soon.” That will be followed the “stimulus and FED’s great work were unprecedented, so new highs sooner than later” argument. Buybacks were the main support and they’re supposed to be dramatically reduced. Europe and Asia in trouble and likely to remain there. FED’s going to lift it all, forever, that’s the new argument in essence. As has been asked, “why are we paying taxes?”

    • Rick Ackerman April 13, 2020, 10:05 pm

      That’s a question I’ve asked myself, Red Will — many times. What could be more stimulative than an announcement that there would be no taxes for 2019 and 2020? The sum of the “revenues” lost to the Guvmint would be no greater than what the Fed seems ready to add to its balance sheet.