The recent rallies on the Dow (^DJI) and S&P 500 (^GSPC) have some investors wondering if the worst of the market declines amid the COVID-19 pandemic are over. The Dow, which rose more than 1100 points on Monday, is trading around 20% above its’ 52-week intraday low from March. The S&P 500 is up around 16% from its’ March 23rd low.
But Matt Maley, chief market strategist at Miller Tabak, thinks another pullback could be lurking. “This is more a bear market trap. I just think we’ve had a first period of liquidation. But I think we could have more of it,” he told Yahoo Finance.
“We’re in a de-risking process and now we have to have the companies, which have loaded up to the gills in terms of debt over the last 12 years,” said Maley. “ As they de-risk and deleverage themselves, that is going to keep the economy from picking back up the way it did following the 2018 deep correction.”
Earnings season for the first quarter start next week with little visibility ahead. Goldman Sachs, with one of the most bearish forecasts, predicts earnings per share (EPS) in 2020 to plunge around 33% compared to 2019.
Maley notes company guidance will be much tougher to define this time around. “Earnings are secondary right now to investor confidence. Before we really get that, we’re going to have to see this coronavirus calm down quite a bit,” he added.
‘You can never pick the exact low in the market’
“Even though I think that we could see the market pullback a little bit more and re-test the lows or even undercut them, you can never pick the exact low in the market with the market already down as much as it is,” say Matt Maley, Chief Market Strategist at Miller Tabak + Co.
Despite the recent rallies, the Dow midsession on Monday was still down around 28% from the all time intraday high it touched on February 12. The S&P 500 was hovering around 25% below its all time intraday from February 19.
‘Dipping your toe back in’
“With the market already down as much as it is, you can start dipping your toe back in,” Maley said. “You just want to be able to go into the the high-quality companies with great management ... that have great balance sheets.”
Investors looking to take on risk, should do so gradually on a scaled down basis, he said. “When you do it that way you may not buy a full position, but boy you’re going to build a really nice base from which to build on, when the coast is clear.”
Ines covers the US stock market from the floor of the New York Exchange. Follow her on Twitter at @inesreports.