Hey everyone, Tim here! Today I’m going to talk about if the markets will have a ‘V’ shape recovery. In order for us to come to an accurate decision, we must understand both sides and both parties point of view.
The optimists are people who are bullish and believe the markets will continue to go up. They have an optimistic view on when the economy will start back up again, and when life will return to normal. I’m going to consider both points of view.
Analyzing the Charts
If you look below on the chart of SPY, which is the S&P500 ETF, you can see that the markets are currently pulling back on this retracement after a huge drop-off in March. On April 21st the markets maintained inside this wedge triangle. That’s an uptrend. Until it breaks below this area we’re not going to see a potential test of the lows. The next couple of weeks are going to be important because we will see if the market breaks past the wedge triangle or continues lower past the triangle. This is based off of technical analysis only.
It has the potential to come up to around 292 for the SPY. People who are bullish believe that we have already hit the bottom, and it will go higher and test back highs from February. Look at Amazon, it’s already broken the highs from April 2019. Facebook remains in a sideways trend. In order for us to get a balanced perspective, we need to take a look at more stocks! I don’t believe that all of these big name stocks have been hit by the consequences of coronavirus.
Use Reliable Sources
The analysis I used on the charts is technical analysis. I saw this crazy new technical analysis drawing… with a lot of “potential” to predict the market. It’s called the rhinoceros pattern. For anyone who uses reliable sources, they know that this does not exist. There’s no such thing as a rhinoceros pattern… There are tons of people right now talking about technical analysis – and not all are accurate sources. Look at the right types of analysis from credible people. If you are interested in learning more technical analysis, stay tuned for more of my blog posts. No rhino patterns or dinosaur patterns here – only solid points and advice backed by experience.
How would a ‘V’ Shaped Recovery Happen?
Optimists believe that the curve will eventually flatten. This means the number of new cases every day must stabilize, and then decrease to zero. Some optimist also believe that in summer the virus will bring an end to the virus because of hot weather or restaurants taking temperature checks. Optimists hope that people will go back to work by summer, and with the help of practicing social discussing less people will be affected. Eventually we will develop herd immunity until there are no cases left. In order to have a ‘V’ shaped economy, people must go back to work and businesses must open.
Will we Accept the Risks of Coronavirus?
Are we going to accept that people will continue to contract coronavirus until we develop immunity? One argument goes as follows. There are 38,000 deaths in the US each year from car accidents, and most people drive to and from work, with the risk of getting into a fatal car accident. This is a necessary risk becuase people need to go to work to support their livelihoods and subsequently the economy. Look at the image below to see just how scary these statistics are.
This same logic can be applied to coronavirus – we live our lives everyday with risks. Optimists believe that accepting the risk of coronavirus is necessary for the economy to have a ‘V’ shaped recovery.
How do you weigh the pros and cons between the economy and the complications of the disease? The economy affects the livelihoods of millions of people and the current state is pushing more and more people into poverty. On the other hand the amount of people who will die may increase if businesses open and life returns to normal too soon. It’s a tough balance and I don’t know the right answer. I’m curious to hear what you think in the comments below!
I want to talk about the pessimist or bearish point of view. These people believe the markets will go lower. They argue that stocks like Amazon do not reflect the overall stock market. Many companies are losing a lot of money because people are not working and consumers are not spending. As you can see in the image below, many earnings reports will come out this week. Therefore this is a crucial week. I think this could be a catalyst to push the economy lower. It is also important to consider, that earning reports from April may not reflect the consequences of coronavirus as well as future reports in July might.
Looking back to the Spanish Flu
Pessimists have been comparing coronavirus to the last big pandemic: the Spanish Flu. The first wave of the Spanish Flu was in March of 1918, the second wave was in Fall of 1918, and the third wave was in March of 1919. Thus if the past is any indicator of the future, we may only be in the first wave of coronavirus, and we could have 2 more waves on the horizon. If that does happen the economy will continually go down. The economy is going to take a huge hit. We could have a huge recession.
The Slow Return to Normalcy
However let’s consider there is only wave of coronavirus. What is the likelihood that people are going to return back to their normal lives immediately after quarantine ends? People will be skeptical for a few months afterwards. Will people feel safe flying? If people do not feel safe flying this affects the airlines and how many people would they can hire. Are parents going to allow their children to go back to school or university? There is going to be a lot of skepticism. It could take a lot longer for normalcy to return than what we expect.
I personally believe we are going to have different periods of quarantines balanced with gradual phases to ease back into the economy. I don’t think there will be normalcy for at least the next six to 12 months. I’m curious to see how it pans out. The government needs to be able to make sure that our healthcare system can handle the amount of infected people. Therefore I believe there is going to be gradual periods of easing back into the economy combined with periods of lockdowns. This is going to happen until we as a society develop herd immunity or we develop the vaccine. However I’m biased to the pessimistic side. No one knows what is going to happen.
Analyzing the Charts
I’m going to pull up some charts to show the technical analysis behind the bearish perspective. The SPY chart needs to break past this down trend line right here. If it breaks past, it’s going to test other levels potentially going all the way to this bottom or a little bit above it. In the case of the bullish perspective, if it comes to this level and it holds, then technically speaking it could go higher. However, on the bear side, what you really want to see is this first trendline break. We will know we’re going into recession if we break past this low that was from March around 218. If it breaks past this and goes lower, we are going to see it test levels potentially in the 180 range. That’s what the bearish side is looking for – first a break of the trend line and then looking for to break the lower.
I always like to think about both sides because it allows you to come up with a better decision without bias. We are in a key area – a gray zone. No one knows what is going to happen in the few weeks or where the economy will go in the next 12 to 18 months. Pay attention to the news and to earnings reports. Comment below your thoughts! Stay safe everyone.