Sure, the stock markets have managed a strong rally back from the COVID-19 crash of late February, but the coast isn’t clear yet, which leads to the question: Will markets test the lows again?
“It’s tough to short the market. Stocks are always trying to go higher. But I do believe the next major move for the market is lower. We will likely test the lows of the crash in May, and possibly fall further.”
The S&P 500 is still off around 15% from its Feb. 19 record-high close, but Banyan Hill Chartered Market Technician Chad Shoop thinks there’s a disconnect between the financial market amid the rally and what’s going on in the economy.
“The market is underestimating the impacts it’s going to have,” Shoop said in reference to the coronavirus pandemic. “Stocks have rebounded sharply and are on track to be back to new highs by June. All while the economy has fallen into a recession.”
“With major cities slow to open and consumers weary of travel and tourism, the virus will leave a lasting impact on our economy — and the market isn’t pricing that in yet,” he warned.
But it’s not all bad because there are some investing opportunities if the markets test the lows again.
Will Markets Test Lows Again?
DoubleLine Capital CEO and noted “Bond King” Jeffrey Gundlach thinks the S&P 500 could easily retest the low of 2,237 points hit back on March 23 after a month-long downward spiral that wiped trillions of dollars.
“I’m certainly in the camp that we are not out of the woods. I think a retest of the low is very plausible,” Gundlach said in a Monday interview on CNBC’s “Halftime Report.”
“People don’t understand the magnitude of … the social unease at least that’s going to happen when … 26 million-plus people have lost their job,” Gundlach said. “We’ve lost every single job that we created since the bottom in 2009.”
Gundlach even put his money where his mouth is and announced he is shorting the market by betting it will go lower.
“Actually I did just put a short on the S&P at 2,863,” Gundlach said. “At this level, I think the upside and downside is very poor. I don’t think it could make it to 3,000, but it could. I think downside easily to the lows or beyond.”
While Shoop thinks that’s a risky move to make, he does think the market will start trending downward again soon.
“It’s tough to short the market. Stocks are always trying to go higher,” Shoop said. “But I do believe the next major move for the market is lower. We will likely test the lows of the crash in May, and possibly fall further.”
And even if shorting the whole market may be a bit too risky for Shoop, investing opportunities will soon reveal themselves.
“If you missed your chance to scoop up companies at discount prices during the first leg of the crash, this second one will offer better opportunities,” Shoop said.
If you can’t wait for markets to fall, instead of betting on the S&P 500 or other major indexes to test the lows again like Gundlach, you could do what Shoop specializes in: options trading.
“If you are looking to benefit while stocks fall, I prefer buying put options on individual stocks, weaker names, that are more likely to head lower, even if the overall market can still rally,” Shoop said.
The markets could test the lows again soon, but you can still come out on the winning end in the long run.