The stock market may be flashing some ridiculously bullish signals, but hedge fund bear Kevin Smith is sticking by his prediction that the Dow and S&P 500 are on the verge of a Great Depression-level crash.
In fact, the Crescat Capital founder warns, this is your “last chance to sell” before the impending collapse.
The notoriously bearish hedge fund manager shared his apocalyptic prediction on Twitter this week. He predicts that the S&P 500 is about to suffer a technical move called a Fibonacci retracement.
He wrote this early Friday morning, just hours after the stock market closed its best month in 33 years:
The macro environment makes me want to be net short today, a recession starting from record valuations and debt. The technical picture only adds to the set-up at this moment, a 61.8% Fibonacci retracement on the S&P 500 from the Feb. 19th top. Resembles the 1930 relief rally.
Smith believes that the stock market picture looks eerily similar to the 1930 “relief rally” that followed the initial wave of the “Black Monday” crash.
After the Dow Jones Industrial Average fell as low as 198.69 in 1929, the stock market appeared to snap back relatively quickly. It closed the year at 248.48 – more than 25% off its lows, and it rose another 18% as the rally stretched into 1930.
But the gains were short-lived. The Dow plunged nearly 50% from its highs by the end of the year.
It ultimately became clear that the 1929 crash was the beginning of a devastating bear market that ultimately wiped 89% off the Dow, which bottomed out at 41.22 roughly three years later.
The Crescat founder and CIO says that this story is playing out in the stock market again, nearly a full century later:
Should be the last chance to sell near the top on the Fibonacci retest. Just like 1929, only this relief rally happened more quickly. Stocks peaked just two months ago at record valuations and corporate leverage. Still very early in the global recession and bear market.
Great Depression comparisons have come into vogue since the coronavirus pandemic forced the U.S. economy into total lockdown. But Smith has been harping on this point since before it was fashionable.
And just as he expects the economy to encounter Great Depression-like headwinds, he believes the stock market will suffer a much more pronounced collapse than we saw in February and March. That may have been the Dow’s fastest-ever bear market, but the magnitude of the plunge still pales in comparison to what transpired a century ago.
According to Smith, that’s about to change.
Fed stimulus juiced the stock market into a phenomenal April recovery, but Smith alleges that the S&P 500 is still plagued by the same ugly fundamentals that made its early-year ascent so unconvincing – insane valuation multiples and overleveraged corporate balance sheets.
Crescat Capital warned in early March that the market was teed up for a collapse long before coronavirus sunk its poisonous fangs into the economy’s longest-ever expansion. The S&P 500’s median enterprise value to sales (EV/sales) ratio had already ballooned twice as high as it did during either the financial crisis or dotcom bubble.
All the pandemic did was light the fuse.
So forget what history says. This time, Crescat claims, really is different. Maybe that’s why all the “smart money” is sitting on the sidelines.
Disclaimer: The opinions in this article do not represent investment or trading advice from CCN.com. Unless otherwise noted, the author has no position in any of the stocks mentioned.
This article was edited by Sam Bourgi.
Last modified: May 1, 2020 3:59 PM UTC