Don’t be fooled by the bull, S&P rally is the ‘death cross’

News Team, 31/03/2020

Last week beaten-up investors may have finally breathed a sigh of relief as the Dow Jones industrial average entered a technical bull market. However, with the S&P 500 seeing its 50-day moving average cross below its 200-day moving average, this is known by technical analysts as the “death cross,’ a sign of a bearish short-term market.

Gaurav Saroliya, director of macro strategy at Oxford Economics said the technical bull market “tells us two things – (1) liquidity is still dire and (2) pessimism is neither widespread nor entrenched with some investors continuing to regard it as a temporary shock.”

However, Mr Saroliya added there were also at least two reasons to treat the above attitude with ‘suspicion’. These included the fact that COVID-19 incidence is accelerating in the US, rather than being contained.

Furthermore, the uncertainty about the extent and length of the shutdowns translates into large uncertainty about the eventual hit to growth and corporate profits. He added “analysts have so far wildly underestimated the growth hit from the pandemic”.

The continued presence of a large number of ‘dip-buyers’ is also another indication that the time to be positioned for the next bull market is certainly not here yet. Mr Saroliva said: “Optimistic investors seem to be satisfied that the extraordinary hit to the US job market will be short-lived thanks to the unprecedented stimulus measures [by the Federal Reserve and US government].”

However, any forms of stimulus in this market while being able to perhaps alleviate some economic hardships will not be able to prevent a substantial hit to activity.

The multi-trillion dollar rescue package passed by the US government last week should not be considered a base for a sustained bull run. The recently huge spike in jobless claims may also not just be a fleeting shock but rather have more dire implications for market risk premia.

“The time to buy will be when pessimism about growth prospects is at its peak. We aren’t there yet, but that point may be reached in Q2,” concluded Mr Saroliva.

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