Is this just a bear market rally?

The most important question for an asset allocator still is: Have we already seen the bottom? The answer is completely open. In the UBS blog they find parallels between the actual bear market and the situation after the burst of the tech bubble.

Fig.1: There were several bear markets rallies during the tech bubble decline

Having lived through that I must raise some points. The decline took almost 3 years now we are having a two weeks period where we went from a bull market to a bear market. In 2001 the rally got stopped by the tragic 9/11 terror attack. At the beginning of 2001 the PMIs showed signs of improvements while now they are in a free fall.

We had stimulus, i.e. mainly rate cuts from central banks while now we have since last week Fed which, beside unlimited QE, acts as lender of last resorts credit to companies and they even buy high yield bonds through ETFs.

The technical picture is in both cases is unclear or even negative.

Fig. 2: S&P 500 trades below several resistance levels and its 200-day average

Fig. 3: Dax might still have some more upside

The DAX continues trading inside a steep trend channel from recent lows. Next resistance level is at around 11’000. But in the end the Dax just follows the US.

Fig. 4: Nasdaq 100 Future above its 200-day average

This is driven by the tech and bio tech sector.

Fig. 5: US Tech Sector trades still above its 200-day average

Furthermore, China A-Shares, where it all began, have not seen a bear market so far.

Fig. 6: Shanghai Shenzhen CSI 300 Index has fallen less than 20%

In China the restart has so far workout without a 2^nd break out of the virus. PMI data have shown a significant spike and is now in the growth area. Nobody so far believes that this is sustainable, but I would not bet against it.

Announced fiscal stimulus stands at almost 10% of global GDP. In China through 2019 there was already significant monetary and fiscal stimulus which has been substantially increased in 2020.

But bottom line is – it all depends when the western world will come out of the lockdown. Strategies vary from country to country. While Austria was the first to impose a curfew, it is as well the first the reopen its economy. France has just prolonged its lockdown for another month. Meanwhile the US president still talks of the 1^st May to restart the economy.

Goldman Sachs has released its latest Q2 US GDP forecast. They are now foreseeing minus 35% (annualized) down from minus 32%. Meanwhile the strategists believe we won’t see new lows in 2020.

Fig. 7: US Strategist are becoming bullish

To sum it up: We cannot know if we have seen the bottom.

But follow a simple rule: Don’t fight the Fed.

The new announced additional Fed stimulus is larger than anything I have ever dreamt of.

Buy on weakness, but don’t buy all at once. So much depends on uncontrollable virus-related facts, that nobody knows if we have seen the lows already. But there is a high probability that we see much higher prices over the next 12 months, which means prepare portfolios for a mid-term recovery.

Published: 14/04/20 by Blackfort CIO Dr. Andreas Bickel on Linkedin

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