Don’t Fall for the Bull

In another week of market twists and turns, we got a new surprise.

Technically speaking, the Dow Jones entered into a bull market on Thursday (local time). Defying the bear market that began just a fortnight ago…

Staggeringly, from Tuesday to Thursday, the Dow Jones posted a 20% gain. The biggest rally for the exchange since 1933!

At face value this sounds fantastic.

It suggests that perhaps the bottom has been reached and the impacts of the virus may be priced in. There are certainly grounds to make that argument. And we could see a lot of investors rush back in due to fear of missing out.

Indeed, you might even be thinking the same thing. After all, my colleagues and I have all been talking about the great buying opportunity to come. Could it have already passed us by?

Unlikely.

See, if anything, this massive uptick in US stocks has me concerned. Especially when they’ve gone from bull to bear to bull in the span of less than a month.

That kind of volatility isn’t unusual, it’s unprecedented.

For this reason, I’d stay wary right now. Because I smell a bull trap…

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Will history repeat again?

A bull trap, for reference, is when markets show signs of a false recovery.

In other words, markets start heading into the green briefly only to collapse much further. It’s a pretty common theme for technical analysts.

Personally, I’m not all that fond of technical analysis. I believe it only tells part of the story.

However, what I am fond of is history. And when it comes to bull traps, history is pretty clear.

Here’s the Dow during 2008:

As you can see, the index had two brief ‘recoveries’ before utterly collapsing. A typical bull trap.

And if you think this is only an American phenomenon, think again. Here is the All Ordinaries from the same period:

It’s practically a mirror of the Dow. Going through two false rallies before crumpling.

You can go through almost every major market downturn and find similar patterns. It’s a quintessential part of recession times.

So, the ultimate question is, are we headed in the same direction today?

Categorically, no one will know until we get all the data. Subjectively though, almost all the signs are pointing to yes.

For instance, this week we have seen and heard about the inundation at Centrelink. People queuing in their droves seeking unemployment benefits. Or crashing the MyGov website for financial support.

Suffice to say, it looks as though a lot of people have and will lose their jobs.

And, if the US data is anything to go by, it will be brutal…

The unemployment bombshell

My biggest concern by far is how sharp this unemployment hit will be.

Indeed, looking at the numbers from the US, once again we’re in unprecedented territory. Take a look:

What you’re looking at is the number of jobless claims by Americans. A graph that dates all the way back to the 1960s.

Furthermore, you can see every major market crisis highlighted in grey. Periods where jobless claims spiked.

Then, what may not have caught your eye, is the figure on the far right. See that slim blue line — that is the latest figure for jobless claims as of 21 March. Coming in at 3.28 million claims.

For reference, the previous record was 695,000 in 1982…

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Now it is typical for unemployment to rise quickly in a recession, but not this quickly. Roughly 8.7 million US jobs were lost during the 2007–09 crash. This virus has brought us to 38% of that total in one week!

Plus, this is likely just the beginning.

As the lockdown drags on more jobs will go. Dragging even more on the economy than it already is. Which will obviously drag on markets.

I realise this all comes across as very pessimistic, but that’s the reality right now. The world is grappling with a crisis. One that will hit markets where it hurts.

That’s why I think we should all be wary of this bull market.

We will see optimism return at some point. But right now there seems to be far more delusion.

Stay aware, stay informed, and stay vigilant.

Regards,

Ryan Clarkson-Ledward,
Editor, Money Weekend