The stock market is facing a moment of reckoning as it either recovers from its Thursday drop or begins another major decline.
The bears have been anxiously awaiting another major stock market crash since April when it appeared the bull market was taking over. Predicting what comes next on Wall Street is far from an exact science, and the unprecedented nature of the pandemic complicated matters further.
Still, many pointed to the dire state of the economy and similarities to the dot-com bust as reasons to be cautious about another crash.
Last week, some strategists said that day has finally come. On Thursday, the Nasdaq finished the day 5% lower, and the S&P 500 posted a 3.5% drop. The Dow, which hasn’t seen the same impressive recovery as the rest of the market’s indexes, also finished the day nearly 3% lower.
Heading into this week, correctly guessing which direction the U.S. stock market is heading has never been more critical. Is this just a run-of-the-mill correction that offers a buying opportunity? Or is it the start of another massive crash?
For all of the negativity surrounding the stock market, a chorus of bulls can still be heard.
David Bahnsen, chief investment officer of The Bahnsen Group, is cautiously optimistic. He noted that the pullback in tech stocks isn’t surprising. So far, Bahnsen says the market’s losses have been “rather hum-drum and immaterial.”
He points to financial and energy stocks, which managed to eke out gains despite the market’s wider loss, as evidence of a bullish trend.
Down days where you see some of the financials and energy and REIT names up despite the Dow down 2.5% and Nasdaq down 5% clearly indicates rotation, not capitulation. This is bullish
Nigel Green, CEO and founder of deVere Group, is similarly bullish about the future of the market. He says investors, himself included, will use this slump as a buying opportunity and rush back into the tech sector:
Drip-feeding new money into the market to take advantage of the opportunities whilst simultaneously reducing risk [is] what I will be doing as an investor.
But Green and Bahnsen’s optimism stands in contrast with some of Wall Street’s notorious bears who say the stock market bubble is finally starting to pop.
Perhaps the most telling sign that things could be heading into worse territory is the VIX, an index that measures volatility in the stock market. As the S&P 500 rose to all-time highs, the VIX rose alongside it, suggesting that the rally didn’t have legs.
The VXN—the NASDAQ’s version of the VIX— had also diverged significantly from the index.
A giant single-day slide doesn’t always suggest a new bear market. As Bloomberg’s Sarah Ponczek pointed out, in 1999, the Nasdaq 100 lost over 4% in a single day five different times throughout the year. But overall, the index doubled for that year.
Market strategist warns of another big stock market crash in the video below.
Others aren’t so sure we should be expecting a swift recovery. Ron William of RW Advisory cautioned that another 20-30% drop could be on the cards. He notes that the Fed’s unprecedented easy-money policies have fueled an unsustainable rally that’s on the verge of complete collapse.
He noted that a handful of tech stocks have driven the market’s rally and that the underlying trend is bearish. William also cautioned that in addition to the VIX’s behavior, investors should be concerned about liquidity issues:
ETF (exchange-traded funds) flows on the S&P 500 is at a new record low, and if we take a look at the VIX (real-time index of market volatility expectations), that has also been in an interesting atypical spike up as markets go up, suggesting potential hedging for downside risk
The next few sessions will offer investors a clearer picture of the stock market’s direction. Still, with a contentious election on the horizon and worries about a second pandemic wave looming, it seems unlikely that the market can continue its upward march.
Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. Unless otherwise noted, the author has no position in any of the securities mentioned.
Last modified: September 23, 2020 2:28 PM