Why You want stock prices to go down!

We were this |—| close to a possible technical buy signal after Monday’s market session. The indexes were within a few points from closing above last Thursday’s intra-day highs, which would have been a higher high following a higher low. That’s usually a hallmark of an uptrend.

While it’s disappointing that the indexes didn’t close above those Thursday’s highwater marks, it has created a pair of knowns in a time of unknows. Now we understand where the upper and lower guardrails are positioned. If index prices can close above the following…

S&P 500: 2,637.01
NASDAQ: 7,809.83
DOW: 22,595.06

…then stocks are likely to head higher in the aftermath.

Last week we mentioned that our short-term momentum indicator and leaderships models suggested stocks could head higher and that’s what happened. Things changed since. Our leadership model stayed above water but weakened. Our longer-term Market Condition model is unquestionably bearish and says to expect wild swings to continue. Finally, momentum is nose down and hints that Wall Street could test the first level of support below.

So, we are looking at…

S&P 500: 2,344.44
NASDAQ: 7,169.86
DOW: 19,649.25

… as key support levels. Our hope is that any current selling doesn’t breach those numbers at the close of trading before they close above the upper guardrail numbers listed above. Whichever side wins is the direction stocks are likely to go afterwards.

On the economic/fundamental side of the ledger, analysts expect earnings to recover in the third quarter (July through September), improve more in the fourth quarter, (October through December) and fully recover in 2021.

Right now, Wall Street expects S&P 500 companies to show operating earnings of $187.66 in 2021 compared to $165.09 in 2020. Both numbers are likely to come down, in our opinion. It took a year for earnings to recover from the 2008/2009 meltdown.

In the subprime crisis, operating earnings fell 39% by form end of the second quarter of 2008 through the third quarter of 2009. Earnings rose by 85% in the following three quarters from there. If the coronacrash follows a similar path, it would put the S&P 500’s operating earnings at $94.27 this time next year and at $174.39 at the end of 2021.

The average operating earnings, price-to-earning (P/E) ratio for the index going back to 1988 is 18.85, topping out at 29.55 and bottoming at 11.51. Using our coronacrash numbers and historical P/Es, we can create a potential range for the index of 2007.23 to 5,153.22 at the end of 2021. Meanwhile, the average P/E would put the index at 3,287.25.

The peak P/E for the subprime crisis occurred at the bottom of the earnings cycle, which makes sense. Again, if the current market follows the same path for earnings and valuation, then the benchmark index would trade at 2,515.96 a year from now (P/E of 26.69 times operating earnings of $94.27). As we type, the S&P is trading at 2,470.50. (For the record, earnings did not fall as hard and recovered much faster following 9-11 than in 2008/2009.)

As odd as this might sound, investors might want stocks to fall in the short-term as downside could be limited from here. It might create one of the last opportunities to get in near the bottom.

Of course, all of that will depend on the course of the coronavirus. However, it sure sounded like Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases, was a bit more optimistic in Tuesday’s press briefing. He said he sees inklings of improvement and sounded confident that we should be on the other side of this within the next 30-days, if we continue to socially distance.

Based on Dr. Fauci, we suspect peak-corona could come in the next two-to-four weeks: fingers crossed, and prayers answered.

If, and we acknowledge it is a big IF, the country can start to re-open for business by Mother’s Day (May 10th), then we could have another two-to-three weeks of a volatile bear market, and maybe the last chances to buy low.

Stay healthy and may all your trades be profitable.

Rich Meyers
Investing-Trends.com