The bears are growing in numbers and stock markets, such as the DAX index and S&P 500 have stopped in their tracks and struggled to trade higher in the last 30 days. The reason for this is simple: the number of new coronavirus-cases has dropped sharply, and the idea that the world economy will overcome the virus spread, and reopen is priced into the market.
What is not priced in is the risk of a second wave of coronavirus-cases, or tensions between the US and Chinese governments. I am not an expert on viruses, but the world is better prepared for a new wave of viruses. Tests are available, hospitals have been built, the people are aware of the issues, some medicines have shown to reduce the death risk of the virus, and the world is working hard on finding a vaccine. As for China and the US, the rhetoric is strong now because of the US presidential election in November, but both countries are too weak to actually make anything serious about all their tough talk.
However, the risk for the world economy persists, and we are seeing signs that the reopening is taking too long time. As an example, Volkswagen is set to pause parts of its car production just a few weeks after resuming work. The VW plant in Wolfsburg employs 8000 people and is the world’s biggest car plant. As usual, the markets tend to move ahead of the news, and the trend in the S&P 500 remains upwards, in Europe, we are seeing the CAC 40 struggle to trade higher, and it could see a sharp decline if the trend in stock markets indeed would turn lower.
Download our Q2 Market Global Market Outlook
S&P 500 Trend Remains Upwards Above May 3 low
The S&P 500 is clearly creating higher and higher lows on the four-hour chart seen below. The May 3 low is the nearest swing low and I will treat the trend as bullish above this level. As the trend is bullish, the S&P 500 might reach the May 10 high of 2955, followed by the March 4 high of 3130.
However, on a break to the May 3 low, the price might be able to reach the April 21 low at 2719, and it might be the start of a bigger slide. However, if the trend indeed turns bearish in world stocks, then I prefer to be bearish the French CAC 40 index.