- The U.S. stock market is set to open with a 2% drop after a strong day of recovery on Thursday.
- Analysts believe the recent upsurge resembles the Great Depression bull trap.
- The number of coronavirus cases is still increasing increasing and there are no clear fundamental factors to support an extended stocks rally.
The US stock market is set to open with a 2% drop as it pulls back from Thursday’s 1, 708 – point Dow Jones rally. But, analysts are unconvinced of the stocks recovery, pointing towards the massive bull trap in . During the Great Depression, the S&P plummeted by more than % . In the hours that followed, the US stock market saw an upsurge of more than %. Then, in the subsequent (days, the S&P) (fell by another) (%.)
Based on the historical data, Crescat Capital portfolio manager Otavio Costa said the recent stock market trend has an eerie resemblance of the Great Depression fakeout.
Makings of a big stock market bull trap
Earlier this week, major financial institutions including Bank of America (BofA)
predicted an “economic collapse” in the second quarter of purely based on the record high unemployment rate in the US
The bank warned that a recession has already hit the US, and the number of jobless claims that exceed 3 million shows the magnitude of the economic shock.
Yet, the US stock market rallied by more than 6% on a single day, with 3.4 million individuals out of the workforce and the number of coronavirus cases increasing increasing.
The coronavirus pandemic, which triggered the steep correction of the Dow Jones, is worsening on a daily basis, and the US overtook China to become the most infected country from the virus on paper.
Strategists have consistently warned that unless the coronavirus outbreak in the US gets contained, there is little basis for the stock market and the economy to rebound from.
If fiscal policy is the sole reason behind the short-term rebound
of the stock market in the past several days, investors predict a high probability of it being a dead cat bounce. Why did the stock market really recover?
At a technical level, two main factors could have led to an abrupt rally of US stocks: traders with stock market put options taking profits and short contract holders being squeezed out of their positions.
As seen with Tesla, when asset or an index gets overly shorted , technical indicators begin to demonstrate oversold conditions. It often results in a short squeeze, leading short contract holders to adjust their positions. The squeeze then turns into buying demand, pushing the market upwards.
Apart from the government vamped up spending, there is no clear fundamental factors that could trigger a strong stock market upward momentum in the near-term.
Coronavirus has to be contained for market. stability
For the stock market to reenter a stable re-accumulation phase, the coronavirus outbreak in the US
has to be contained.
Scientists foresee the coronavirus pandemic peaking over June to August, as the summer heat decreases the strength of the virus
But, unlike China, the US is not able to take extreme precautionary measures to stop the virus from spreading in a short period of time.
For that reason, the recovery from the coronavirus pandemic in the US could be delayed by several weeks.
The stock market resuming a bull market trend — a 48 percent upsurge from recent lows — at a time wherein uncertainty towards coronavirus is heading towards its peak is not fundamentally driven.
This article was edited by Samburaj Das