How Low Can Stocks Go?

Stocks were hammered this past week. It was the worst move on the S&P 500 in a while. That index fell each day, pushing it to six straight losses, and it lost 3.1% in just a week. Still, it is up more than 4% so far in 2024 and more than 29% since the end of 2022:

I have been bearish, as I explained on 4/10. If only I had waited until then to get bearish!

If each week were like this past week with a 3.1% decline, the S&P 500, now near 4967, would drop by 69% to 1549. This would be below the low in 2020! I don't think that is what is going on, but I do remain bearish.

The decline this week was partially due to inflation reports that continue to make it less likely the Federal Reserve will live up to its own expectations that it will cut interest rates. I discussed this early last week, and the inverted yield curve remains something that should leave investors cautious for now.

In the negative piece on the overall market 11 days ago, I expressed concern for Mega-Caps and for Technology stocks. Since that piece, the S&P 500 ETF (SPY) has dropped 4.7%, and the NASDAQ 100 ETF (QQQ) has lost 6.2%. I don't know the future and don't think anybody does, but I believe that they can go lower. This is a presidential election year, and there are huge wars going on in the Ukraine and in Israel. My negativity has nothing to do with these issues.

Most people look at the S&P 500 as the benchmark for American stocks. As I said, SPY is up more than 4% still in 2024. It was up at its peak this month almost 10%. The market plunged in early 2020, when the pandemic hit the U.S. The market has more than doubled since that low:

It looks to me like the market has topped, but perhaps it hasn't yet. A bear market is traditionally defined as a move downward of 20%. SPY peaked this month at a little over 523 on a closing basis, and a 20% decline would be 418.54. This would not be even a six-month low! I think it could fall a lot more.

After the peak in the S&P 500 in late 2021 near 480, it fell in 2022 to as low as 357 on a closing basis, which was a decline of almost 26%. It was a bear market and then it wasn't!

I will be watching a lot of things and am not committed to a decline of a certain amount or any sort of timeline. I do think that the market could drop a lot, and my current expectation is that SPY could fall below the late 2022 low. My current range for the low that I expect is between 320 and 340. This would be a decline from the peak of 35% to 39%.

Here is the SPY chart over the past 5 years:

I have my target area highlighted. 340 was the old all-time high before the pandemic, and 320 represented the peak of the bounce from the low after the pandemic hit and then support after it broke out. Could it fall more? Sure. Might it fall less? Yes.

This big decline that I envision potentially ahead would be similar to the drop during the pandemic. That move, though, was 35% in about a month! I am guessing that this downward move will play out over a longer period of time.

I use charts, but I am also a fundamental analysis person. Again, I am expecting that rates won't fall and will likely rise. The valuations seem very high to me for many stocks, especially the big ones. I believe that forward PE ratios matter a lot, but I don't track the S&P 500 estimates. The reality, in my view, is that its the PE ratios of its members that count, and I do watch some of them closely. I believe that the one-year forward PE ratio on SPY is near 20, which seems too high to me.

My negativity has taken a long time to play out. Last year, I was very negative on Tesla (TSLA). My negativity proved right, but it took longer than I expected. The stock just set a 52-week low on Friday:

Since I posted my first article on this blog about stocks that aren't cannabis-related, the two that I wrote about have plunged. NVDIA has dropped about 12%, and Super Micro has plunged by more than 33%. Both are still up a lot in 2024 and likely to go lower over time.

I did share 4 stocks that I owned in my IRA right after that negative article, suggesting they might be buys. I own all four currently. Two of these are higher now, and two are lower. I do see a lot of value in many stocks. Just not the big ones!

I currently don't write about stocks in general anywhere but right here. I have no way to make money dispensing my thoughts about stocks except for cannabis stocks, where I share my views on the sector and 23 companies that are publicly traded at my subscription service, 420 Investor. I run my own investments, both in my IRAs and in a trading account. I help my wife with her IRA, and I greatly enjoy doing so. Her style is very different from mine, and I respect that. I own all four of the stocks that I mentioned in that article in mid-March, and she owns one of those. I currently also own three other stocks, and she owns one of those too.

So, I have expressed my negative views on the stock market and have shared the new information of how low it might go. I haven't been a bear for that much of my life, and my trading account is currently only slightly short now (long 4 stocks and short 2). My IRA is net long effectively 1% (long 7 stocks and long 2 inverse ETFs). While I am very negative, I understand that the market doesn't move in a straight line.