Watch out below.
Stocks are already well into bear market territory with the S&P 500 down nearly -30% since its record high on February 19, the Nasdaq down -27% since its high on the same day, and the Dow down -32% since its high on February 12.
The coronavirus crisis has sent stocks on a wild ride as the number of cases surges higher, the economic picture looks ever-more bleak, and as travel restrictions and local lockdowns sows panic.
But even as stocks seem to be in free-fall, Piper Sandler chief market technician Craig Johnson warns that the market still has further to go.
According to Johnson, charts indicate that the sell-off is more measured than the chaotic day-to-day moves in the market.
“The charts absolutely are giving us guidance at this point in time,” Johnson said. “They’ve been actually trading technically perfect.”
Johnson said the technical picture implies the S&P 500 will drop to the 2,350 to 2,325 range – 2.5% to 3.5% lower than where the index is now.
However, another corner of the market is signaling a much larger fall before the S&P 500 bottoms out: small caps.
“If I look at the Russell 2000 as kind of the foot soldiers in the market, … I’ve got about 75% of those stocks in the Russell 2000 closing below the December 2018 lows and only about 50% in the S&P 500,” Johnson said. “Foot soldiers are the ones that sell off first. The generals are the ones that kind of get hit last, and those generals still… need about another 10% to 15% washout before you get to those levels.”
If the S&P 500 were to sink another 15%, it would take the index to a level not seen since 2016.
“It takes anywhere from two to seven weeks for those washout levels before you actually can step up and safely buy into the market,” Johnson continued. “And so I think it’s a little bit more time.”
Joule Financial’s Quint Tatro agrees that the sell-off isn’t over yet.
“The fear is strong, but it looks like we could have even further panic,” Tatro said, adding that trading in this market is not for the faint of heart.
“If someone is young with a long period of investment time horizon, we really advise doing nothing different – in fact, making sure they continue with their contributions and their retirement accounts,” Tatro continued. “Those folks that are closer to retirement with a shorter time frame, this is where it gets very, very tricky. And I think, going through their allocation, making sure that they are appropriately allocated with enough fixed income to give them a few years if this takes a very long time to come back.”