There could be a stock market crash on the horizon as several negative catalysts loom and the VIX shows sentiment is shifting again.
After a multi-day selloff at the start of the week, the Dow Jones Industrial Average reversed course on Thursday. But will the about-face continue? Jim Cramer thinks not, citing technical analysis showing another stock market crash could be looming.
Cramer’s technical analyst Mark Sebastian says another stock market crash could be on the cards, citing unusual behavior from the COBE volatility index in recent days.
VIX usually spikes when the stock market crashes, as it did in March. The index also tends to take time before getting back to norma—often delivering another major spike, which is associated with a stock market crash.
Cramer and Sebastian pointed to the VIX’s sudden rise from the mid-20s to the mid-30s over the past few days as the potential beginning of a second spike.
Of course, technical analysis isn’t fool-proof. There are a lot of factors that go into delivering a stock market crash. But looking forward to what’s coming, it’s easy to imagine the VIX continuing to climb as conditions become even more uncertain.
Bulls have argued that the Federal Reserve’s unprecedented stimulus action has created a backstop for the U.S. economy that is keeping markets afloat. Now we’re nearing the end of those stimulus dollars, which could be a key catalyst that crushes the stock market.
This week, Fed Chair Jerome Powell added to the bears’ argument that markets haven’t fully absorbed the economic impact of coronavirus. He noted that the economic pain from coronavirus would be lasting. Powell also cautioned of a potential credit crunch as stimulus dollars start to dry up:
The recovery may take some time to gather momentum, and the passage of time can turn liquidity problems into solvency problems. Long stretches of unemployment can damage or end workers’ careers as their skills lose value and professional networks dry up, and leave families in greater debt. The loss of thousands of small- and medium-sized businesses across the country would destroy the life’s work and family legacy of many business and community leaders and limit the strength of the recovery when it comes
This summer could be trying for the stock market as Americans are weaned off government support. In July, the $600 worth of additional coronavirus unemployment insurance that millions have been receiving will disappear. That could cause a wave of defaults.
While economies are starting to slowly reopen, business activity will likely remain depressed throughout the summer. That’s because although businesses are permitted to reopen, many aren’t able to.
Restaurants have been hit hard by coronavirus, but they aren’t making a comeback yet. Reservation data show that although many would like to get going, doing so at 50% capacity is not possible. Margins are already razor-thin and the cost to operate at reduced capacity often outweighs the potential benefit.
Plus, many restaurants may not be able to get their staff to return. Right now, those who’ve been laid off are collecting $1,200 per week. Servers whose income is largely based on tips are unlikely to make that kind of money in the current environment.
The cherry on top of this market-crushing cocktail is rising tension with China. Between Donald Trump’s pressure on China to take responsibility for coronavirus and Beijing’s inability to meet the conditions laid out in the Phase 1 trade deal, the U.S. is locked in a debate that’s impossible to win.
The U.S. can’t afford another trade war with China, not while its economy hangs in a delicate balance. But Donald Trump also can’t afford to take a softer stance on Beijing with the presidential elections just months away. There is no good outcome from this scenario. At some point, that will hit the market in force.