The Stock Market Bear Market Rally Is Over

While stock markets can always bounce back and move higher, it appears that the increase in coronavirus cases, very high valuations and perhaps some gains at the end of the quarter have ended the bear market recovery. If Covid-19-related hospitalizations and deaths begin an upward trajectory, it will be difficult for markets to recover.

The Dow fell 730 points or 2.8% on Friday to close just over 25,000 at 25,015. Since its recent high of 27,572 on June 8, it has fallen 2,557 points, or 9.3%.

The S&P 500 fell nearly 75 points or 2.4% on Friday to close at 3,009. It has decreased 223 points from 3,232 or 6.9% since June 8.

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It has performed best and kept the S&P 500 from falling even further. While it fell 260 points on Friday, or 2.6%, it was only down 374 points or 3.7% from its recent high of 10,131 on June 23.

Coronavirus cases on the rise in Arizona, Florida and Texas

From early to mid-June, coronavirus cases on a seven-day moving average have increased from 300% to 400% in Arizona, Florida, and Texas. Florida and Texas are re-implementing some restrictions to control the virus, such as allowing bars to deliver or takeaways and restaurants to have 50% capacity. Apple
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It has also announced that it will close 32 of its stores in five states (Arizona, Florida, North and South Carolina, and Texas).

Across the United States, only four states according to CovidActNow.org show they are on track to contain the coronavirus. When you drill down into an individual state, you can see various data such as your infection rate, positive test rate, and percentage of ICU rooms being used.

Ratings extend

From the time the stock markets hit their March lows, the 12-month PE ratio for the S&P 500 nearly doubled from 13x to a recent 23x. This was due to a combination of the upward movement of the index and lower earnings forecasts.

At the beginning of the year, FactSet projected that S&P 500 companies would earn nearly $ 200 ($ 196.57 to be exact). This has now dropped to $ 163.45 and there is still a year and a half to go. This causes the index to trade at a PE multiple of 18.4x vs. 16.4x earlier in the year when the outlook was much better. While the gains may recover from the current estimate, there is also a high probability that they may continue to decline.

The graph shows that the rally is over

Jim Cramer on CNBC sometimes highlights a table by Queen Fibonacci, Carolyn Boroden. It uses the exponential moving averages of 5 days (blue line) and 13 days (red line) to show upward and downward trends in the markets. When the lines cross, it tends to show that the market has bottomed or has hit and could reverse direction. Please note that while this chart shows a discernible pattern, no chart is perfect for reversing.

When the 5 days are above the 13 days, the market moves higher and tends to stay on that trend until the lines are crossed. The most recent occurrence started around April 1, but ended this week.

The same goes for the downside. When the 5 days are below 13 days, the market tends to decrease. The 5 days flirted moving below the 13 days around June 15 and finally did this week. With Friday’s drop of nearly 75 points in the S&P 500, it is now decisively below 13 days. Unless the markets recover in the two days, the gap will persist and will probably widen.

Also note on the right side of the chart that as of Tuesday, June 16, the Index rose to 3,153 from 3,155 on three different days and retraced each time. Multiple failures to break above is another negative sign for the market.