It has been three months since the global stock market touched its lowest point. Since then, there has been a smooth sailing in the US stock market for two and a half months. It makes people wonder, has the bull returned? Let us recall.
On 23rd March 2020, if you said the market had reached the bottom, people would say you’re insane. But it was indeed at the bottom and the Dow Jones Industrial Average (DJIA) has surged over nearly 50% from 18213 to 27580 before the correction began on 11th June 2020. While the media attributed to the sharp correction on the emergence of the second wave of COVID-19, the fact is that, if the market has gone up too much too quickly, it ought to correct.
One irony is that the US market have seemed to be immune from all sorts of negative news; from exceptional high unemployment rate, death toll, bankruptcies, tensions between the US and China, to the recent massive protests on racism. Thanks to the Federal Reserve’s unlimited QE, the market know that they have a big boss behind to do everything he can to ‘save the economy’, therefore, there’s nothing to be afraid off. Nevertheless, the euphoria of the stock market does not reflect the reality. Finally, the Fed Chairman Jerome Powell has admitted that the US economy outlook is bleak and warned that many Americans are set to be out of work potentially for years.
Subsequently, a sharp correction began, as punters seemed to have awakened. Some would say this is merely a correction, while others deem that the music has stopped and another collapse is imminent. To have a better picture of the market, let us have a look at the technical chart of Dow Jones Industrial Average (DJIA) until 12th June 2020.
Disclaimer: The companies or strategies mentioned in this article are meant for study purpose only. It doesn’t constitute any ‘buy’ or ‘sell’ recommendation. Please consult your financial professional if you want to make any decision.
There are two characteristics of this correction. First, the index opened with a huge gap, going south with a long bear candle, penetrating the MA200 line but settled at above the 25000 level. This shows the bear has won the first round, and has huge strength to continue subsequently. Secondly, even though we can see a rebound of 477 point the next day, it was minor compared to the major fall of 1862 the day before. However, the index still has two strong supports points, namely the 25000 level, which is coinciding with the MA50 (pink line), followed by the critical 24000 level.
Obviously, the rally before has ended. So, where would DJIA go next? I believe it is likely to go south first before going back to north again. The question is for how low and how long before the trend reverses? Looking at the committed bear candle on 11th June 2020, I see the possibility of the index falling below 25000. But so long as it doesn’t go below the 24000 level, the chances of coming back are higher.
What Affects the Sentiment Now?
I believe the following is what the market is concerned for now:
1) The second wave of COVID-19, especially the massive protests held in the US and Europe, as we can see there was no social distancing when people were marching on the streets.
2) The intensified tensions between the US and China. With the US presidential election coming nearer, this topic will inevitably get heated up.
3) Once the market discovers some jobs will not be back in the short term, and it’ll take much longer for the economy to recover, it would turn jittery again.
4) Oil price. While the major oil players have agreed for production cut until end of July, excessive storage would lead to oil price correction. In addition, the second wave of COVID-19 will also have a negative effect on the oil demand. Eventually, weaker oil prices will have an impact on the stock market.
5) Unlimited QE and perhaps negative interest rates. While unlimited QE has been an effective tool in enhancing the liquidity of the market, it is a double-edged sword. Now we have started hearing the possible collapse of the US dollar because of abusing it for the sake to stabilise the market.
So has the bull returned? Since the market still have so many concerns, I believe the answer is ‘yes’, as an old adage says, ‘Bull market climbs wall of worry’. So, take a deep breath and continue enjoying the climb.