The Dead Cat Bounce

On February 19, 2020, the US market it an all-time high.  The S&P 500 hit $3,393.52. In a matter of 26 days on March 23, 2020, the S&P 500 hit its 52 week low of $2,191.86.  WOW. That was a 34% dip in the market. For a point of reference, the 2008-2009 recession saw a 56.8% dip in the market.  Since 1932 there have been 25 “corrections” or dips as we like to call them in the S&P 500. Out of the 25, the one we are experiencing today is the 9th largest dip in the last 88 years.  This is quite an interesting statistic. My point in this post today is that I believe it isn’t over, and it is only going to get worse.

 

S&P 500 Loses

 

If you look at all the past dips, you notice each one contains a slight rally of growth before again falling to even great depths.  The 2008-2009 plunge saw a 25% rally before falling to 52-week lows. The bear market from 2000-2002 saw three separate rallies of around 20% before finally settling in at a bottom more than 50% lower than the peak.  In market jargon, we call these “Dead Cat Bounces.” This is when the market has a slight rally where investors think they can see the light, and no more fully red portfolios will be occurring.  In the 2000-2002 Bear Market image below, you can see the market attempt to regain the moment three times before finally bottoming out. This was during the dot com bubble and 9/11. An economic blunder and a tragedy combine to result in a 49.1% overall fall for the market.

 

Dead Cat Bounces

 

Our current situation resembles the 2000-2002 dip the most.  Only that we are only experiencing the tragedy right now from COVID-19.  The economic effect has yet to weight in. I say this because the whole world has been put on hold.  Factories, offices, airports, laboratories, and more are closed. All growth within companies has been halted.  More importantly, 6.6 million Americans filed for unemployment last week. That adds to the additional 3.3 million and 6.9 million from the previous two weeks.  There has been talk of unemployment hitting record highs dating back to the great depression. Also, without companies making revenue, how can they afford to keep all their employees? Layoffs shortly will be occurring, and unemployment will only increase.  

Yes, I know what you are thinking.  COVID-19 is slowly being handled, and the market is reacting positively towards it.  I also agree with that statement and thought that the market would regain its bull market trend once COVID-19 was being contained.  What we forget is how much profit and business opportunities are being missed during this time of quarantine. Typically during earnings reports, a company, say Amazon, may come out with slightly lower numbers than predicted and also project lower numbers then investors want to see.  That is your standard bad earnings report where Amazon takes a 5-8% hit, and within 3-6 months, they are back to normal. Now think about every company across America, across the globe that isn’t making any money, they aren’t furthering their products, and they have to layoff employees to stay afloat.  A second swing is approaching. Not because of COVID-19 like we saw already, but because of the delay in companies.

Now, I was speaking to a friend of mine who is also heavily involved in the market, and we were comparing this dip to others throughout history.  Specifically, we both experienced the 20% dip in December of 2018 as we watched our stocks crash, and personally, we were a little hurt by it. Yet that overall bear market took three months, compared to our current dip, which took 26 days.  It started in Septemeber when the market initially took a 10% dip in 30 days. Then for about a month, the market was up and down confused on here to go until finally, it took about a 13% dip that ended around Christmas time. The connection I am trying to display here is that we are in the middle of the Dead Cat Bounce.  As you see drawn in red below, we are on the rise of the “bounce.” Which means something worse is approaching us.

 

New

 

This is the time to sell your stock if you haven’t.  I already sold over 50% of my portfolio in preparation for the second dip.  In fact, my father told me in early February to sell some stocks since the market was so high…. Obviously, I didn’t do that, but you live, and you learn. The plan here is to trim off my portfolio because I currently have no cash on hand.  I want to have some cash on hand to invest when the market takes a turn for the worse. I have been updated on the FED pushing in 2.3 Trillion dollars, yes T not B, into the market to support the economy and stop it from getting worse. Still, I feel this will have little effect throughout this pandemic and economic dysfunction.  Good Luck to all my young investors! I hope everyone can learn from this post and be prepared for the worse. In times like this, it’s better to have your cash on hand.



Categories: Analysis

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