S&P 500: The Next Stock Market Crash May Have Just Started

Summary

• The S&P 500/SPX had run up by nearly 50% since its mid-March lows.
• However, leadership became extremely thin in recent sessions as the "Big Five" and other large tech companies did much of the heavy lifting.
• We also noticed massive underperformance in the Russell 2000/small-cap index yesterday, which alarmed us quite a bit.
• I expect this "pullback" to continue.
• Target correction range is from 12%-20% from recent highs, or about 2,850-2,550 in SPX.
• This idea was discussed in more depth with members of my private investing community, Albright Investment Group . Get started today »

Image Source - Is the next stock market crash just starting?

The S&P 500/SPX (SP500) is down by around 80 points this morning, now testing the key support level at 3,100. It looks like that the economic reality is not nearly as constructive as stock market optimism has been implying in recent weeks.

Image Source

COVID-19 is not going away, and as mentioned in previous articles it's likely to continue to weigh on economic growth as well as on stock prices going forward.

The Second Wave

More than a dozen states are showing significant resurgences in Novel Coronavirus/CV cases. Naturally, this will likely weigh on consumer confidence, employment, other data, and overall economic growth.

Image Source

However, is this really the second wave of the CV? Not likely, as this is probably just the extension of the first wave due to premature "re-openings," relaxed attitudes, densely-populated protests, and other factors. When the second wave comes it will likely be in the fall, coupled with the cold and flu season.

Please keep in mind that this could lead to a certain level of pandemonium, as many people will not be aware whether they have the flu, a cold, or the Novel Coronavirus. There will also likely be uncertainty about the outcome of the election by then, another negative factor for markets overall.

Market Outlook

We've been cautious throughout this rally, as it was artificially induced by enormous Fed stimulus, and we saw an evident disconnect between the real economy and the stock market. Furthermore, I never believed, and still do not believe, that the economy will return to "normal" any time soon. In Q2 we chose to allocate a large portion of our portfolio to the gold, silver, mining/GSM sector, as well as to Bitcoin and other systemically important digital assets. The reasoning behind this was that these assets would outperform due to their inflation proof/resistant qualities. After all, the Fed is printing an unprecedented amount of money, so it makes sense to own assets that should benefit from the underlying phenomenon.

Having said that, we do own some stocks, but our non-GSM equities/ETF segment makes up only around 15% of our portfolio now. We've also been taking some profits on their way up in certain names.

Not all was looking well yesterday

Source: Albright Investment Group

Yesterday, I mentioned that I did not like the way the SPX and markets in general were trading. We saw very thin leadership, primarily from the "Big 5" and other big tech names. Most other sectors, especially the more cyclical ones did not trade well, closing near the lows of the session.

Another factor that troubled me notably, was the massive underperformance in the Russell 2000 small cap index.

We saw that the Russell 2000 was sending out a clear warning signal yesterday, as small caps are typically supposed to lead a recovery, because they essentially represent the state of the American domestic market.

So, What's Next?

Source: Think or Swim

We see that we had a massive rally of nearly 50% from the mid-March lows. Many of the stocks in our watch/buy list that we put out around the lows in March appreciated by 50%, 100%, 150% or even more in some cases. Now it's time for a pullback, possibly even a correction.

The best case scenario is that stocks bounce back from the current (roughly 3,100) level. However, this is not likely in my view. We could see a pullback of around 7% from recent highs, which would bring the SPX down to roughly 3,000 support.

However, the selling may not stop there. The market could decline further to its next major area of support at around 2,850. This may be the likeliest scenario right now, and would represent a correction of around 12%. Nevertheless, in a more severe case scenario, the market could fall all the way back down to the 2,550 point, roughly a 20% correction from recent highs.

Analyst’s Disclosure: I am/we are long A DIVERSIFIED PORTFOLIO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

This article expresses solely my opinions, is produced for informational purposes only and is not a recommendation to buy or sell any securities. Please always conduct your own research before making any investment decisions.

Comments

[Concernedabout]

nope the crash didn't happen....

[M Elan]

no crash can happen when you're on a permanently high plateau

[angad 25]

Has the crash started

[WWS Swiss Financial Consulting SA]

Good article. The markets are extremely volatile, and caution is needed to assess risk carefully. Overbought markets usually have a correction. @Victor Dergunov is right to think that there could be a severe pullback. Q2 results will be terrible,and that could trigger selling.

[Victor Dergunov]

@WWS Swiss Financial Consulting SA Thank you, yes a strong pullback into Q2 earnings would be favorable, and this is what we are banking on right now. What will occur after Q2 earnings should become more apparent within the next several weeks.

This is not a market you should stay long or short in for a prolonged period. It is better to be nimble, as volatility brings enormous opportunities, all be it with increased alpha and risk as well.

[Lord100]

"GLAMOROUS" MEGA Caps are MASSIVELY overvalued. "Who" R they going to sell too 7 TRILLION? 25% OF US Mkt cap. These need to be sold for mkts to go down..

#MSFT 1.55T, Up 600B in 2M,140B 1Wk
#AAPL 1.55T, Up 700B in 2M, 160B 1Wk
#AMZN 1.35T, Up 700B IN 2M, 120B 1Wk
#GOOG/FB/V 2.5T, Up 900B IN 2M

Sell any index etfs like QQQ, XLC, XLK and SPY Index ETF hugely skewed to mega caps.

[M Elan]

pay for intact monopolies as long as governments are willing to leave them intact

[daneedwards9]

@Victor Dergunov Thank you for the insightful article. When do you think the SPX will reach the levels you just mentioned in your article? How far up do you think the rally will go after? Thanks.

[Victor Dergunov]

I cannot disclose exact price targets, as more detailed variables are primariy available to our investment group members seekingalpha.com/...
But I can speculate and say that the SPX could be at 3,500 by year end, or it could be far lower...

[M Elan]

You seem less certain than some posters. Fun to smell all the animal spirits around here.

[Victor Dergunov]

I am quite confident in my calls.... Market looks like it is headed lower, short-term, possibly longer and deeper...

[CF42]

I would have a lot more respect for this article if it wasn’t your 4th or 5th bearish article since March 31st. Anyone who followed your advice and went short would have been absolutely smoked. I was really bearish too, then realized the market was overly bearish in the short term. Now, I think it’s finally set to head lower, 2nd half of the year should be pretty disappointing when numbers start coming out

[Rafatali]

Hahahahahaha
Fully agree

[Victor Dergunov]

@CF42 I never said I went short, and we've been long the market for more than 10 years...

[Fosters]

When numbers come out nobody will care. It's all going to be in forward looking statements. Such as business is picking up... projected future earnings. That's what will trigger a move higher. Markets are already expecting dismal numbers

[Vandooman]

Or it may not crash. We are only a few months from vaccines.

[Victor Dergunov]

@Vandooman doubt it.....

[Michael Bryant]

@Vandooman :

It only took one month to wipe out 30% on the S&P 500 ($SPY) a few months ago. It will only take 4 consecutive days like Thursday to bring the index back down to the March lows. If we fall, it won't take a few months. http://schrts.co/BBNkvAvd

As for vaccine, 40% of Americans say they won't take a vaccine if there is not sufficient safety data. Plus, $INO's and $MRNA's vaccine won't start Phase 3 trials till July or August. They may have one ready for emergency use by winter. But it takes time to mass produce after Phase 3 trials if successful and FDA approval.

[Wilbodave]

@Michael Bryant

I think the plan is to start producing the most promising vaccine(s) before it's approved (Which may be what you are saying).

www.hhs.gov/...

[Jean Valjean]

I finally found out how many additional deaths there are in the US from all causes YTD. 1% higher this year YTD than in 2019, which was 1% higher that in 2018, which was 1% higher than in 2017, which was 2% higher than in 2016. So for whatever reason American mortality rates are growing slowly. Regardless, the 2020 numbers show that whatever lives were saved from the covid by the lockdown, they were more than offset slightly by deaths from other causes, presumably due in part to the lockdown: suicides, drug overdoses, alcoholism, domestic abuse and other violence, and deaths due to fear of going to the hospital for other conditions or outright denial of treatment for "elective" procedures.

[Illuminati Investments]

"So for whatever reason American mortality rates are growing slowly."

Growing because Americans are growing...fatter, that is.

[Vandooman]

There have to be fewer traffic deaths.

[kostov1]

Population grow

[Mamadou Cherif Diallo]

the solutions go fare a way with this dominant system. the capitalism is a failure. we must change

[Tack]

"Socialism is the philosophy of failure, the creed of ignorance, and the gospel of envy.”

“The inherent vice of capitalism is the unequal sharing of blessings. The inherent virtue of Socialism is the equal sharing of miseries.”

-- Winston Churchill

[Illuminati Investments]

@Tack Ha, I was just gonna post that second quote.

Great minds...yours and Winston's, I mean.

[Vandooman]

To paraphrase Churchill's comments on democracy, capitalism is the worst possible system, except for all the others. The vast majority of communist countries have dumped socialism. Capitalism creates wealth. In the USA the poor drive used cars. In a communist country no one has a car.

[soleprop]

First wave, second wave, continuation of wave -- what difference? Just so long as those carelessly abandoning social distancing are aware they are taking a chance on bending down very low between their legs and kissing their sweet ass goodbye. If I were a meat packing plant employee ordered to work by the orange prevaricator, I'd be pooling my money with all the other workers to kidnap it and send it as the last pig down the line. They are experiencing casualty rates higher than soldiers see in modern war.

[User 47845185]

@soleprop

Betcha give all those rioters a big hall pass when it comes to complying with CDC guidelines.

[soleprop]

@Seeking Alpha Junkie
Nope, they're just as stupid as those advocating removing social distancing and premature re-opening of dangerous and unnecessary businesses.

[Vandooman]

First, no one is being forced to work. Anyone is free to quit. Second, we have 320 million people to feed. Third, your TDS is utterly boring and demeans you.

[Freigeist]

Thanks for clarifying. I thought it was just a normal pullback within a new bull market.

[starcorral]

The legacy of morons, dipsticks, self proclaimed Nostradami, ANALysts, etc seems to have paved a road of poverty and terror through every aspect of American civilization. This nonsense comment is as valuable as wet corrugated boxes littering a divided highway.

Once - while driving from southwest Missouri to Memphis, TN.- I found myself listing to NPR (National Public Radio) as scientists - all PhD's in multiple fields - discussed the significance of a small fish which become endangered due to the management of waterways to prevent flooding, assure adequate annual water supplies for human consumption and irrigation, and power generation.

As it turns out - after three hours - the scientists agreed that nothing could be done today other than to monitor activity promoting water management and to take up positions to protect the little 4" fish from human encroachment.

As it turns out, the little fish is protected from predation by virtue of glands which excrete a bad tasting slime land animals and other fish find objectionable. In fact there are were many cases of large schools of the fish causing contamination of waterways under certain climatic anomalies.

When the program ended at 5:30 AM, the scientists agreed that the role of the little (nuisance) fish must be the center of future discussion as was the infamous "Snail Darter" fish which postponed an east Tennessee Dam project for a quarter century preventing what was estimated at $15 billion in delayed benefit of a largely impoverished area.

Garbage out yields garbage in. This NPR radio show presented such a laughable worthless waste of human thought I figure it was "as bad as it can possibly be". Now - after 10 years of investing, I realize that talking and typing nonsense is a disease for which there is no cure.

My expert opinion of the future is as follows: "Things in the future will not be the same as today; they will be different." See if you can modify your behavior based on this comment and better yourself down the road. GOOD LUCK.

[dbm_stuff]

Or more simply put most talking heads are wrong.

[Vandooman]

If one thing has been learned in these time it is how often "experts" are totally wrong. My favorite examples are Paul Krugman saying the internet would have no more impact than fax machines and later that we would be in a depression by the end of 2017. Shows what a great country we are that people still read this guy.

[Illuminati Investments]

Paul Krugman is so clueless that he accidentally invented MMT but didn't realize it.

www.youtube.com/...

[M Elan]

Some real animal spirits here. Consensus seems to be that June 11 was a rinse job.

[nochance]

My opinion is you are wrong. Amazing how the doom and gloom that people like you wish to speak about only comes out after a bad day. So funny. We already bounced today 50 points on futures today.

[Rafatali]

Today the same author will write about optimisim and market bouncing

[daneedwards9]

Victor, thank you very much for the helpful insight. I look forward to buying the nice dip here.

[NT 61]

"The Next Stock Market Crash May Have Just Started". Or not.

That about covers the possibilities.

[nochance]

Amazing article. The market will either go up or down. Such insite Lol

[Rafatali]

I liked this comment more than the article

[User 50039191]

A lot of big managers missed the boat in March so it is to their advantage to pump up a scare tactics so they can point to their clients and say look at us we were right even if we were off by months and months and missed a huge rally and I can scoop up the shares have plus retailers abandon in their panic after they made the initial right decision.

[User 50039191]

Or maybe it hasn't.

[Cousinspizza]

The market Tell was when Druckenmiller said he might have been too pessimistic on the market 3 days before the drop.

[EdwardOC]

Sometimes I wonder I why bother to read SA's market strategy. Stating the obvious facts based on anecdotal data and dime-a-dozen trivia should be censored.