This isn’t my usual MO but I’ve always promised myself I’d be absolutely honest in my assessments of what I think is going on and how it might affect the investments of my subscribers, readers, listeners and viewers.

You know I talked about a bounce once the COVID-19 numbers headed in the right direction. We got that but now this rebound will be tested.

I can see why a more-trader-inclined stock player could sell everything right here and just wait to see if the negative factors set to smack the stock market will be measured or get out of hand.

That said, I did like the way the US market sold off by only 730 points (or 2.84%) on Friday as COVID-19 infections started to mount in the US. But this could be the calm before a storm.

If you’re nervous, what you have to work out is whether this will be the second leg down that a lot of fund managers have been expecting.

Let me list the reasons why you might be suspicious of stocks right now:

1. The US reported 45,000 cases of the Coronavirus on Friday taking the national total to 2.46 million cases and “…as of Friday, the U.S.′ seven-day average of new cases increased more than 41% compared with a week ago.” This trend could easily spook Wall Street because as infections rise, the threat of a slower economy reopening becomes very real. This affects company sales, profits and share prices.
2. The chart below is a sensible reason to be concerned that the US stock market rebound, as measured by the S&P 500 Index, is way ahead of itself.
3. 

Before the Coronavirus crash, the Index was at 3386.15 and is now at 3009. So that’s 337 points (or 12%) off its old high. And given what’s expected to happen to the US economy, does that make sense? Not really. So that’s why I talked about a sell off on last Monday’s Switzer TV Investing show. Our market is still 21% off our pre-crash high of 7162, so we shouldn’t dive as hard as the US. But if Wall Street puts on one of its hissy-fits (that’s driven computers, ETFs, AI and all the modern stuff that has increased market volatility over the past decade), then we could fall more than we should.

“Fatigue was to be expected after the best 11-week sprint in market history, a gain of 44% in the S&P 500 from March 23 through June 8,” observed CNBC’s Mike Santoli. And he’s absolutely spot on. A sell off is way overdue.

3. The big tech-growth stocks (i.e. the FAANG group) must be due for a pullback, thought they have shocked us for years.
4. May to October is historically the slower half for US stocks, so this big May-June period could easily give way to stocks wariness and a correction, which means at least a 10% drop for key market indexes.
5. The median S&P 500 stocks trade on a forward P/E of 20 times, which is historically high but history has never had interest rates or the cost of capital for big business so low. That’s part of the reason why stocks have done so well, despite the economic fears linked to that damn virus.
6. Warren Buffett hasn’t been a buyer, which has some inexperienced commentators saying that the Oracle of Omaha is “washed up” or is a “has been” but I can’t get out of my head something he said years ago: “A pin lies in wait for every bubble.”
7. Locked up Coronavirus novice traders, especially in the US, could panic if the market sells off. This could exaggerate any stock dumping, which would be the reverse of what I think has happened with the rally Stateside.
8. Even before the virus data worsened, the charts were telling us that the market was set to move sideways to downward. See the chart of the S&P/ASX 200 below that shows how there has been a rally leg up, followed by a sideways period before another leg up. Two weeks ago the view was that if the improvement in virus data and the reopening of economies continued in the right direction, we could expect another leg up. But that was then, this is now!

Source: Fairmont Equities

9. Fund managers in the US are wary. From a Citi survey, the respected bank’s equity strategist Tobias Levkovich reported:

• They maintained cash levels twice the long-term average, which says they’re nervous.
• Most think 2021 corporate-profit forecasts are too high.
• Only a third think the S&P will be back to early-June levels above 3200 by year end.
• When asked whether a 20% market drop or 20% rally was more likely, 70% of managers chose a 20% decline! (CNBC)

10. Given the nine points made above, how likely is it that profit-takers will just say: “Let’s just sell and if I’m wrong, I can get back in after a 5% rise but if I’m right, I could avoid a 10-20% loss or maybe more?”

I don’t think a huge sell off is likely but it could happen if the second-wave of infections goes crazy. If it did, I’d be a buyer of the stocks that surged after the last stock dumping and now, like I did then, I’d be expecting to make money in a year or even two, because I’m a long-term investor, who buys good quality companies when short-term traders get scared and panic sell.

That has been the story I’ve sold to you for years and I’m not changing it now.

P.S. And then there’s the Trump US election ahead that could also unsettle stock markets but I’ll keep the above list at ten.

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