Has the stock market crash of 2020 ended?
Sharp sales in the stock markets caused by the Coronavirus in February / March 2020 are unlikely to end soon, regardless of comfort advances and stimulus packages. Technical and fundamental analysis indicates that the declining market in stocks is likely to continue until the markets retreat by 50% of their highs, and perhaps even more, as the markets absorb the economic costs of the measures taken to contain the epidemic. The S & P500 index is likely to drop to at least 1750 levels during 2020.
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On February 19, 2020, the US stock market hit an all-time high, as measured by the benchmark S & P500 index. During the 15 trading days, the index collapsed and fell more than 20% of its value from the highest high. This was the fastest collapse in the US stock market over the past century, exceeding the speed of the stock market crash of 1929, which took 30 days to complete a decline of 20% from its heights. A 20% retracement of the top is the traditional definition of a bear market, and when it happens quickly, it can be described as a breakdown.
The stock market crash of 2020
The stock market crash of 2020 has affected not only the United States but also all stock markets around the world. The majority of markets and market indices witnessed declines from top to bottom by more than a third of the value, although these declines were followed by advances to higher levels, at the time of writing this article, almost a third of all declines had been barely compensated.
The big question for traders and investors is whether it is possible for the stock markets to retreat more to new lows, and if you do, then how much, or will a recovery process start without penetrating the recent lows, which will indicate that now is the time to buy stocks. Indeed, this question is for everyone, as the health of the stock market can have a direct impact on the health of the "real" economy, gains, and unemployment as well. We can try to answer this question by looking at two factors: what caused the stock market crash of 2020, and how does it compare to other market failures that occurred during the past century.
Reasons for the stock market crash of 2020
The main obvious cause was the global epidemic of the Coronavirus, which rapidly spread from China to the heart of the Group of Seven countries in Western Europe and North America. A highly contagious disease with no cure, which initially appeared with a mortality rate between 2% and 4%. It was a very important event with no real precedent in the developed world since the Spanish flu in 1918. This reason alone puts the primary market panic in a psychological category. Distinctive and definitely contributed to the speed and strong sharpness of the breakdown. The unique situation makes it difficult to compare this collapse to historical stock collapses.
There are two main secondary reasons usually referred to: the oil price war between Saudi Arabia and Russia, which may be considered the first spark, and the fact that there has been a bullish move in the market for a long and extended period, which has seen a strong increase in the value of shares since Donald Trump's election in November 2016, which was calling for at least a strong correction. Broadly speaking, the markets were considered overly bought.
It is possible to compare these reasons later with the underlying causes of historical collapses in stocks in order to help determine the historical precedent that is likely to be useful as evidence for what will happen in the stock market during the coming months and years.
Technical comparison of the declining US stock market from 1929 to 2020
A declining market can be defined by the decline in the main market index by at least 20% from top to bottom. It is also useful to identify the peaks that are the highest levels ever since there can be no logical doubts that the market is bullish when it achieves the highest prices ever. According to this criterion, there has been a 13 bear market since 1929, including the bear market that started in 2020. The vital statistics of all these bear markets are shown in the table below and are categorized down in descending order by severity as measured by the overall decline from top to bottom. We can see that the bearish market for 2020 (identified in yellow in the table below) is indeed the seventh sharpest in terms of intensity from 1929. Of course, we do not yet know how long this bearish market will hold or what is the severity of the worst downturn from top to bottom.
There are a number of conclusions that can be obtained from comparing this technical analysis:
The declining market for 2020 witnessed the fastest market transformation from upward to downward in more than a decade.
Only one other declining market witnessed a decline in the size of the 2020 decline without achieving a decline from the top to the bottom by at least 50%.
The last two markets witnessed two declines since 2000, achieving maximum declines from highs to lows by more than 50%. Volatility from collapses may have tended to increase in recent decades due to the new technology enabling remote spot trading and fast algorithms, which are likely to accelerate and exacerbate market movement.
Among the worst 4 bear market, three of them needed at least 185 days to develop. Bearish markets that have evolved very quickly have tended to face a less severe extreme decline. This represents a more optimistic case for the stock market in 2020 and 2021.
From the previous data above, there is no clear conclusion to be obtained regarding the probability of the final downside of the bearish 2020 market. However, technical price analysis may provide some technical indicators that could be useful precedents.
The stock market crash of 2020 is expected to develop
Falling markets in stocks tend to fall more quickly than emerging markets. In addition, once the markets make strong declines that exceed 20% off the peak, if they continue to drop to form new lows, they rarely retreat beyond 50% of their full decline. These markets tend to achieve large lows that persist for a period, which is then breached to the strong downside, which gives a reliable bearish signal. We can apply these principles to the price action of 2020 shown in the monthly chart below for the S & P500 index.
The movement from top to bottom continued during February and March from around 3400 to 2200. This means that the indicative (mental) docking of a 50% retracement of the retracement "turning point" will appear at 2800. If the market manages to first monthly close above 2800 without a breakout Large just below the current swing low below 2200, this will be a bullish signal and indicates that the bottom will not be tested again. Another reason why the 2800 level is technically important, lies in the fact that it is very close to the point where this market completed its initial drop of 20% from the peak in February 2020.
Another bullish signal would be the end-of-month closing above the closing price achieved six months ago.
If this bear market will face difficulties in order to stabilize above 2800, and instead it will start trading in a convincing manner without swinging back below 2200 directly, this technically means that this bear market will develop like the falling markets for 2008, 2001, 1973, or even 1929, And keeps dropping further.
The stock market crash of 2008
The monthly price chart below shows the 2008 stock market crash, which really started in 2007:
The second month of the initial pullback (shown by the candle above the top arrow) produced a floor that lasted for more than a month before breaking through. This reinforces the importance of the low initial low that is tested after some time after a major correction. It is not marked, but it can be seen that there was no monthly closing above the initial 50% correction level.
After several months, there was a strong bullish bounce, which peaked at the candle indicated by a down arrow. Note that this candle was not able to close monthly above the 50% retracement level, and the market continued to make more new declines and lower prices in the long run.