This Is Not A 2008 Style Stock Market Event – Mike Swanson (03/02/2020)

Gold is up before the open today and so is the stock market. Look for mining stocks to begin a nice snap back. This is not a 2008 style stock market crash happening.

I know there is a lot of fear out there and a lot of anger though people are having with the stock market. Emotions are getting tense for many people in the trading world and people are getting hit by the stock market volatility. There are newbies who just got into the markets recently via phone apps who have never seen the stock market drop before and there is a lot of misconceptions about what is happening that I need to clear up.

I received several emails last Friday and over the weekend from people who think gold is going to crash with the stock market now like it did in the Fall of 2008 and emails from many others who think that this is a 2008 style financial meltdown and are worried.

Look – gold is not crashing. Gold is still above its 200-day moving average and is still up for the year and we are not in a financial crisis moment like we were in 2008. Gold is even now up before the market open to show us this morning that it truly is the only thing that is going to be certain now in the markets going forward.

In 2008 the banks were going under, because they were inolvent.

That is not happening now.

In 2008 the stock market fell due to a full blown credit crisis.

That is not happening now, because there is no credit crisis.

In fact corporate bonds on Friday rallied to new highs.

In 2008 corporate bonds were falling all year and then began to crash that September before the final stock market meltdown that happened in the final weeks of that October. See this 2008 chart of the popular corporate bond LQD for example.

And here is LQD now. It just made a new high this past Friday.

Obviously corporate bonds are not crashing like they did in 2008. They simply are not doing that.

That 2008 action in bonds drove all stocks down, including mining stocks, because corporate America needs the bond market to raise money and bonds fell as part of an overall deterioration in credit conditions.

Remember credit default swaps?

There is no banking crisis happening at this moment and corporate bonds are still going up.

I think their rally will end one day and they will go into a new bear market, but that is not happening this week and this market drop is not about that.

This is not a 2008 financial style meltdown.

That’s why gold is not going to crash.

And it’s why the stock market and the situation is not as bad as many are saying it is.

You really need to go back to August of 2007 and April of 2000 and the Nasdaq for a better comparison to what is happening in the stock markets to understand what is really happening when it comes to the stock market. That was more of a reverse momentum bubble bust. The S&P 500 that April fell about 20% as the Nasdaq tech bubble bust and then rallied back up into Labor Day. And the market of today was going straight up into last week’s drop in a momentum mania that even caused stocks like TSLA to go straight up like some of the internet stocks did in the final weeks going into that April 2000 top. Now the stock market momentum simply reversed and created enough losses to generate what is forced selling for many now in the markets.

Near zero interest rates has created an environment where people cannot buy stocks based on valuations, but only on pure price momentum and the belief that stocks always go up similar to the way people thought about real estate in 2005.

Think for a moment about the young guy who just opened up a Robinhood Account a few months ago who put all of his money into TSLA and SPCE because they are “new technology” and ACB because “dope is cool” whose only information is the daily price gyrations on his phone app. He has no idea what a P/E is much less how much debts these companies have. He had no idea what he was doing and is now going to sell just with as little thinking to as why he bought in the first place. That of course is just small fries – they don’t have the type of money to really move the markets. But their appearance as a force in the market was bubble sign and when these margin players and small fries finally panic out things will turn back up. I think these folks are pretty much flushed out by now though with what happened to the markets on Thursday.

As far as people saying that this virus is going to make the stock market crash. The influenza Spanish flu virus of 1918-1919 infected 1/3 of the entire world’s population and killed more than 50 million people with a 7-10% mortality rate. And during that time the DOW went from 75 to 110. Some 675,000 Americans died from influenza and the stock market went up. Stock market investors at that time did not care, because stock market valuations were super cheap as things were coming out of World War I.

The lesson for us is that the stock market can go up on bad news and down on good news. All that matters is the market trend and when you have wild valuations like we have had for years any news can become an excuse to sell. The virus doesn’t make the market fall it is the market structure itself that dictates the future of the stock market.

And this virus is not the Spanish flu. We will know by the end of the week if it is really spreading or not, but I think it’s time to end this fear mongering over this virus.

I stand by my video I did this weekend when I said the stock market should rally now. If you missed it watch it by going here:

http://wallstreetwindow.com/2020/02/the-stock-market-should-rally-now-after-lasts-week-big-dow-drop-new-video-mike-swanson-02-29-2020/

-Mike



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