The U.S. stock market is set to record another brutal week of losses, and there is no question that the stock market bubble has now burst. Coronavirus cases have started to surge in Europe, and one million people have lost their lives globally because of Covid-19. The question that investors are asking themselves is how low can this stock market potentially go?
Are Stocks Going Down?
The short answer is yes. The U.S. stock market is on course to record its fourth back-to-back week of losses, and it seems like investors and traders’ priority right now is to keep booking profits, before they see a full-blown crisis. The S&P 500 index erased all of its yearly gains this week, and it fell into negative territory. The S&P 500 was able to reach its all-time high, and it recorded two more record highs before giving up all of those gains.
The fact is, we have not seen a losing streak of this duration since the coronavirus market crash. Saying that, the magnitude of the current stock market sell-off is still not very strong. Bear in mind that back in March, it took only four weeks for the S&P 500 and the Dow Jones Industrial Average to record losses of more than 35%. This time around, both of the indices are down approximately 10% from their recent highs.
Overall, the Dow Jones Industrial Average is down by 6.04% year-to-date (YTD), the S&P 500 has declined by 0.45% YTD, while the Nasdaq Composite is still up 24.77% YTD
What Has Led The Stock Market Sell-off?
There is no doubt that the current stock sell-off is primarily led by the tech sector. The Nasdaq Composite index pushed the U.S stock market out of its misery during the coronavirus stock market crash. But now, the FANGMAN stocks, Facebook, Apple, Netflix, Google’s Alphabet, Microsoft, Amazon, and Nvidia are failing to keep the Nasdaq Composite alive.
The Nasdaq has recorded three weeks of consecutive losses, and it is on the verge of recording more losses for this week—which will make four weeks of back-to-back losses.
What’s Behind the Stock Market Crash?
The coronavirus situation over in Europe has deteriorated. Record cases across Europe have put hospitals under stress again. European leaders are trying their best once again to circuit-break the trend, and they have re-introduced some restrictive measures. On Thursday, France recorded 16,096 new Covid-19 cases, and the U.K also saw the biggest one-day surge in coronavirus cases since the pandemic outbreak started. The U.K. reported 6,634 new coronavirus cases yesterday.
Of course, these sorts of numbers, along with the restrictive measures being imposed are only going to make investors more and more concerned. This is natural, because restrictive measures translate directly to lower economic activity.
The Dow Jones, the S&P 500, and the Nasdaq Composite indices are chiefly failing to maintain their momentum because of the rise in coronavirus cases. Yes, there is the possibility of a vaccine by the end of this year, but there are also abundant challenges ahead for the manufacture and distribution of such vaccines, at the necessary quantity. It is likely that we may continue to see this sell-off sustaining in the U.S. equity market for a while yet.
What Could Stop the Current Sell-off of U.S. Stocks?
The U.S. economy has been long awaiting another stimulus package, and the policymakers have failed to deliver it so far. The first stimulus package effects are almost over, and the U.S. economy needs another stimulus package. This particular measure can perhaps reverse the current stock market crash and push the Dow Jones, S& 500, and Nasdaq up.
House Democrats are crafting another almost $2.4 trillion fiscal stimulus package. However, the challenge will be to bring Senate Republicans and the White House on board. So far, the track record of this shows that another stimulus package isn’t likely to become a reality any time soon. This could easily take some weeks or months before becoming a reality, if at all. During that time, it is likely that we may continue to see the stock market sell-off or at least continue to grind lower.
How Big Could the Crash Get?
The full-blown stock market crash hasn’t even started yet, and it is unlikely to take place given the unwavering commitment we have seen from the fiscal and monetary policy side in the U.S.
Central banks are ready to do whatever it takes to heal the coronavirus’s current economic injury.
Having said that, there are some important price levels that we all should be paying attention to with respect to the Dow Jones, the S&P 500, and the Nasdaq. All of these indices are trading below their 50-day simple moving average (SMA) on the daily time frame—a price level that usually marks the first weakness of the bull trend if a stock index falls below this moving average on a daily time frame.
The next hope is that the Dow, the S&P 500, and the Nasdaq will stay above their 200-day simple moving average (SMA) on the daily time frame—the most critical price level among technical analysts. If the U.S. stock indices, especially the Dow Jones, which is the lagging index, break below the 200-day SMA on the daily time frame, the chances are that we are going to visit the March low.
Another important signal will also be the violation of the 200-day SMA by the Nasdaq Composite, and its failure to move back above the 200-day SMA.
Under the current circumstances, the sell-off we have experienced this week is likely to extend into the next week. In order for this stock market crash to stop, we need to see the coronavirus situation slowing down dramatically.