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#1 29-06-2020 10:01:41

Admin & Trader
From: Paris - France
Registered: 21-12-2009
Posts: 2886

S&P 500: a bearish scenario is looming

S&P 500: a bearish scenario is looming

We're living in crazy times as far as stock market investments are concerned, as traditional stock market valuations are being challenged by scalpers who are ready to take on more risk than usual.

Warren Buffett, the most successful stock market investor of all time, is being criticized for not making any purchases during this crisis. Although sitting on a pile of cash at Berkshire Hathaway, he did not buy the decline caused by the virus situation.

Now that the stock market has recovered and some indices have even reached historic highs, many are beginning to wonder where will the market go next? Is there more room to the upside or not?

Consumer confidence should worry bulls

Trader confidence has returned to the market - day traders attracted by the fractional shares offered by Charles Schwab suddenly have access to the stock market with no limit to the amount they can invest.

Clearly, it's easier to be long than short, not to mention the unlimited risk of short selling a stock - you can make a 100% gain if the company goes bankrupt, but you're exposed to unlimited losses if the price goes up. Even in the event of bankruptcy, companies have found buyers willing to double or triple their money by buying shares for pennies and taking advantage of the crowd effect.

The risk, however, is that consumers may have pursued the shares at a higher level. A quick look at the historical correlation between the S&P500 and consumer confidence reveals an interesting fact: in the last few economic crises, consumer confidence has fallen to an average of 43, if we look at the years 1993, 2004 and 2008.

Now, consumer confidence stands at 85, which is much higher than the average reading during the aforementioned crisis. In a way, it offers an explanation for those who are sitting on the sidelines and refusing to buy at current valuations. Buying when consumer confidence has fallen below 49 has proven to be historically correct - it is almost as if we have hit the bottom generated by the crisis.

The graph also shows that consumer confidence may fall further before a possible turnaround. The consequences are that the current turnaround in the stock market is only temporary and that the virus situation will not go away so easily. In order for the stock market to fall and join the movement of consumer confidence below 49, it is assumed that the virus situation will continue to have a negative impact on the economy.

What will ultimately prevail? Buffett's wisdom or the enthusiasm of the younger traders?

"Anything worth having is worth going for - all the way." - J.R. Ewing



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