In what could be an ominous sign of things to come, the stock market couldn’t hold on to a massive rally yesterday. Stocks closed the day in the red.
The Dow Jones Industrial Average climbed as much as 937 points intraday. This was before it gave back all the gains and closed the day down 26 points.
It could turn out to be a turning point that many experienced investors have been predicting.
Their belief is that the rapid 20% rebound in stock prices couldn’t last. They also believe that we may eventually re-test the March 23 lows.
900-Point Rally Fails
Jim Cramer, host of ‘Mad Money’ on CNBC seems to be slowly coming around to the idea.
“Just think about the last 500 Dow points [Monday]. I don’t know. They were done in, what, about 30 minutes. That’s not sustainable. There are people who are just anxious about taking something off the table because they’ve just seen a remarkable two-day bull market, and now they’re ready to find out about … the various stages that we need to get out.”
David Kostin, the chief U.S. equity strategist at Goldman Sachs, believes that stocks are poised to fall again. He mentioned that it’s likely, if you compare it to how the market behaved during the 2008 financial crisis.
“The way I think about this is [there’s an asymmetry] in terms of downside risk towards a level in the S&P 500 of around 2,000, which is about 25%, and an upside of around 10% to a target at the end of the year of around 3,000. [That’s not symmetrical] in terms of timing. I think the risk is a lot further towards the downside,” Kostin said. He then added: “I would just remind you that in [Q4 2008], there were many different rallies, they’re called bear market rallies, some of which were almost 20% a couple of times, but the market did not bottom until March of 2009.”
“I wouldn’t be surprised if we hit 2,000 on the S&P 500 ”said Alex Chalekian, the CEO of Lake Avenue Financial.
He added “We’re going to see opportunities and we’re going to take advantage of them,” he said. “But in the meantime, there’s no rush to jump back into the market right now.”
Economic Strategists React
Peter van der Welle, a multi-asset strategist at Robeco says “From a sentiment angle, recent exceptional bounces suggest that investor sentiment is still in the denial phase, rather than in the phase of capitulation that paves the way for a new bull market.”.
In addition, Albert Edwards, a global strategist at Société Générale, said that investors hoping that monetary and fiscal stimulus can save the market through this rally have made a mistake. “This optimism is the legacy of a long bull market. Investors can’t conceive that the Fed will ‘allow’ the stock market to collapse. Think again. That was the view in 2007 too,” he said.
Finally, Goldman Sachs conducted a poll with more than 1,800 of its institutional clients as respondents. It found out that 50% believe the lows have not yet been set. The survey also revealed that 75% believe equities remain in a bear market.