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The Stock Market’s Bear Market Rally Has Ended

While stock markets can always rebound and move higher, it appears that spiking coronavirus cases, very high valuations and maybe some profit taking at the end of the quarter have ended the bear market rally. If the related hospitalizations and deaths from Covid-19 start an upward trajectory, it will be difficult for the markets to rally.

The Dow fell 730 points or 2.8% on Friday to close just above 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 dropped almost 75 points or 2.4% on Friday to close at 3,009. It has declined 223 points from 3,232 or 6.9% since June 8.

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

Coronavirus cases spiking in Arizona, Florida and Texas

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

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

Valuations are extended

From the time the stock markets hit their March lows, the forward 12-month PE ratio for the S&P 500 almost doubled from 13x to a recent 23x. This was due to a combination of the Index’s moving higher and earnings forecasts being slashed.

At the beginning of the year the S&P 500 companies were projected to earn almost $200 ($196.57 to be exact) by FactSet. This has now fallen to $163.45 and there is still a year and a half to go. This has the Index trading at an 18.4x PE multiple vs. 16.4x at the beginning of the year when the outlook was much better. While earnings may rebound from the current estimate, there is also a strong likelihood that they could continue to drop.

Chart shows the rally is over

Jim Cramer on CNBC sometimes highlights a chart from the Fibonacci Queen, Carolyn Boroden. She uses the 5-day (blue line) and 13-day (red line) exponential moving averages to show upward and downward trends in the markets. When the lines cross it tends to show that the market has bottomed or topped and could reverse direction. Note that while this chart shows a discernable pattern, no chart is perfect for investing.

When the 5-day is above the 13-day the market is moving higher and tends to stay in that trend until the lines cross. The most recent occurrence started right around April 1 but ended this week.

The same goes for the downside. When the 5-day is below the 13-day the market tends to decline. The 5-day flirted moving below the 13-day around June 15 and finally did this week. With Friday’s almost 75 point drop in the S&P 500 it is now decisively below the 13-day. Unless the markets rebound in the two days the gap will persist and probably widen.

Also note in the far right portion of the graph that starting on Tuesday, June 16, the Index climbed up to 3,153 to 3,155 on three different days and pulled back each time. Multiple failures to break above it is another negative signal for the market.

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