Over two years ago, we posted a write-up on our blog titled “The Selloff” which provided several bullish reasons why the pullback in the S&P 500, at that particular time, appeared to be “merely a healthy bull market correction”. Just two days before that posting date (on Feb 9 2018), the S&P 500 had hit an intraday low of 2551, which represented a 13.7% pullback from the all-time high of 2899 just nine days earlier. From that mid-Feb low, the S&P 500 rallied 32.8% over the next two years, reaching yet another new all-time high of 3386 on Feb 20 2020.

We were bullish back in 2018; in 2020, unfortunately that is no longer the case. To say that we are witnessing unprecedented times is obviously an understatement. Given we’re not epidemiologists or fortune tellers, we can only speak to past and present market conditions and provide an outlook on what the future may hold from a technical perspective…and from our vantage point, it’s not looking good.

The following daily chart of the E-mini S&P 500 futures contract provides several technical observations worth noting:

• The intraday high of 2965 came very close to the 200-day simple moving average (SMA 200) which is a key resistance level.
• A fifth of five waves of an Elliott Wave pattern appears to have completed.
• A common Fibonacci retracement level of 61.8% was met (looking back at the last several recessions, 50%, 61%, and even 76% retracements were common prior to lower lows).
• Volume has been declining since the retracement rally began on Mar 24.
• The volatility index (“the VIX” or “fear index”, not shown) has remained elevated at or near 40 since early March.

A few other random facts worth noting:

• Every market decline since the Great Depression that was greater than 30% took a minimum of one year from peak to trough (the S&P 500 has declined 36% and we’re only a little over two months in).
• Warren Buffett recently sold off his entire stake in the airline sector, warning that “the world has changed”.
• Travel, Tourism & Hospitality represented 10.4% of global GDP in 2019 (statista.com).
• Over 30 million Americans have filed for unemployment benefits over the last six weeks; that’s around 18% of the working population.

So with all of these negative factors weighing heavily against a V-shaped economic recovery, there is a wildcard: government intervention. The US government has waged all-out war against deflation (an even greater evil than inflation), launching a $2 trillion consumer stimulus package, cutting the Fed Funds rate to near zero (issuing forward guidance that rates will stay low), reinstating QE, providing low interest lending to securities firms and backstopping money market mutual funds to name a few. Of all the weapons and tactics that Fed Chairman Powell has at his disposal, the one that could have a significant impact is NIRP or “negative interest rate policy” (basically charging savers a penalty). With debt-fueled GDP growth the increasingly popular path to global economic prosperity, governments are essentially forced to stimulate spending through, well, more deficit spending. And what better way to make consumers spend than to penalize them for not spending. But is NIRP even sustainable? Or even legal or ethical? We’re becoming increasingly convinced that NIRP, regardless of how inherently wrong it may be, is where the market bottom may be found.

Now, with all of that said, MCR continues to focus research efforts on trend-based technical and mechanical strategies and systems. So, regardless of whatever direction the market decides to take…up, down or sideways…our goal is to profit from it.

Stay safe and healthy.