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Right now, investors are spending hours looking at charts and trying to time the bottom.
I'm warning you right now: Stop trying.
The market's negative momentum is the highest it has been since December 2018. And there is no justification for a bounce back with sentiment where it sits.
The Fed has already cut interest rates by 50 basis points. The Dow plunged several hundred points after the announcement and then proceeded to shed 2,000 points on Monday, March 9.
Last night, U.S. President Donald Trump announced emergency actions to boost small-business loans, provide delay taxes, and press for payroll tax relief. Futures fell 600 points moments after his speech.
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This morning (Thursday), another circuit breaker halted trading after the S&P 500 dropped 7% in the opening minutes of trading.
I want to make one thing clear: I'm not trying to sound bearish over the long term.
I spent the last 10 years of my life studying financial crises, and right now, I'm telling you that this is going to continue because of market behavior. Buying pressure will eventually return, but it will take a while before we see positive momentum again.
The viral contagion has given way to the threat of financial contagion.
Growth stocks – those great disruptors with no earnings and promises of greatness – are getting crushed. Readers of the Quantum Tracker have benefited from big gains taking aim at Snap Inc. (NASDAQ: SNAP), Etsy Inc. (NASDAQ: ETSY), and other zombie companies as a result.
Value stocks will eventually find favor, but they too are getting crushed by this market sell-off.
The correction is not over.
And right now, there are three major things that could drive this market even lower…
It appears that people are only focused on the first floor.
But there's far more danger on the horizon, no matter what the Fed does.
I want to show you the three basic factors that could see this financial crisis lead us from a top-to-bottom drop of more than 40%.
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Market Sell-Off Trigger 1: Earnings Disappointments Are Coming
First-quarter earnings reports are already expected to be dismal, coronavirus or not.
Valuations were stretched badly enough in December.
On Wednesday, the S&P 500 was sitting at 2,741. Or 20.6 times trailing earnings of 133.
This morning's downturn puts us at 19.6 times earnings.
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The mean is 15.78, which would take us all the way down to 2,098.74.
Just cut that in half – that puts us at 17.69 and right around 2,350. Hitting that level would represent another drop of 14% from yesterday's close.
There's your first rung of the ladder.
Market Sell-Off Trigger 2: the Passive Investing Time Bomb
About the Author
Garrett Baldwin is a globally recognized research economist, financial writer, and consultant with degrees from Northwestern, Johns Hopkins, Purdue, and Indiana University. He is a seasoned financial and political risk analyst, with a focus on stocks, hedge funds, private equity, blockchain, and housing policy. He has conducted risk assessment projects for clients in 27 countries, and consulted on policy and financial operations for some of the nation's largest financial institutions, including a $1.5 trillion credit fund, a $43 billion credit and auto loan giant, as well as two of the largest Wall Street banks by assets under management.
Garrett joined Money Map Press as an economist and researcher in 2011, specializing in alternative strategies with an emphasis on fundamental and technical analysis.