Dark clouds all over, things will get worse

On 28^th February 2020, I wrote, “ If we look at the given chart of Nifty we can see that the index have support between 10K to 10700.  At this point in time, I believe that the support should work and Nifty should find its feet at these supports. In case things worsen and everything goes downhill the ultimate support for Nifty exist at 8500 levels.”

On SPX, I wrote, “If S&P closes below 3000 levels for two consecutive months (I presume this will happen) the target on the downside will be steep. S&P has support at 2700, 2400 and 2100 levels. In the worst-case circumstances, S&P may fall to 1800 levels. This should be absolute long term bottom if at all it happens.”

When I wrote this Nifty was trading at 11600 and it fell 3000 points, while S&P500 was trading at 3000 fell 515 points. Nifty found support at 8555 levels and S&P found support at 2485. When I wrote the post on 28^th February, I never thought that this will come to pass so soon.

Generally, I never rationalize the reason behind price movement because I believe that there are several factors which impact the price at any given point in time. A human mind cannot understand and judge the impact of multiple factors which may pull price in a different direction.

However, the current fall in markets are abnormal and every day we see a 5% sell-off in equity markets. I think the driving factor behind this fall is the COVID-19 pandemic which has caused the crash in market confidence. As per my understanding market, P/E reflects the investor’s confidence in the future. When the future becomes uncertain the P/E contracts and vice versa.

I believe that the current pandemic is yet to run its course. From whatever I am reading my understanding is that the west is grossly underprepared for tackling the crisis. If we look at the given chart, we can see that the US, UK and western Europe are tracking China’s trajectory. Italy with 25000 cases and 1800 death is 2 weeks ahead of US and we don’t know yet whether Italy has peaked out.

In case the US continues the same trajectory, the number of infected people and the number of deaths will be multiple of what we see today. If this happens, we will see a massive multiple (P/E) compression in all risk assets including equity markets in the US and globally.

If I am reading this situation correctly, I think we will see Nifty trading at 6000 levels and S&P500 trading at 1600 levels. I also believe that this will be a once in a decade opportunity to invest in stocks.