I recently had a chance to connect with Neppolian of Jade finance and below is the summary of main points
Analogy of Spanish Flu from Feb 1918 to April 1920: using DOW
1. The index bottomed in Dec 1917 (ending a 13 month bear market from Nov 1916 suffering a 40% drop).
2. Markets rallied ahead of the arrival of Spanish Flu proving once again that there is no better lead indicator than financial markets. Spanish Flu originated in US in Feb 1918 as an antidote to end the previous bear market. (We had amply proved in our 2014-15 pandemic report that, pandemics have historically bullish for markets and generally stike at the fag end of a bear market).
3. Dow rallied 85% from the bottom to register a top in Nov 1919. So, Dow topped 4 months before the Spanish Flu officially ended in April 1920. By April 1920, Dow had already corrected 25% from the top. Markets again proved to be the leading indicator.
4. Dow eventually fell much deeper and went on to retest the Dec 1917 bottom in August 1921. Then it was testing the 200MMA support.
5. The bear move began after the Dow closed under 20MMA in Feb 1920.
6. We don’t know, as of now , when will the Covid19 pandemic end. We do hear certain voices that by Mid 2022 the Covid19 pandemic may largely be over. However, going by history, the markets may top out and begin a correction a few months ahead of the pandemic officially ending.
7. Dow has rallied 95% from the Covid19 bottom of 18200. We are into the 17th month of rally from the bottom.
8. Technically Dow looks stretched with collapsing internal breadth numbers.
9. The signal to sellout (20MMA) is now at 30600, approximately 15% lower. Portfolio may suffer badly by the time we wait for the breach of 20MMA. It may not be out of place, actually may be prudent to consider proactive profit taking from CMP of 35600 to further upsides if any.
10. The 200MMA is now placed at 18600. Though in the Spanish Flu of 1918, Dow eventually fell to test 200MMA , we are in no way advocating that it would so this time around too, but our endeavor is to lock in profits when the markets allows us rather than sell in panic when it reverses.
11. It is to be remembered and noted that post the August 1921 bottom retest , the DOW launched itself into the most biggest rally of 8 years upto 1929. The antidote provided by a pandemic is generally long term and a bullish sign for the decade.
However, portfolios survive better by being light at market tops and heavy at market bottoms.
Also we had a talk on US dollar whose direction decides the fate of risk assets
usd quarterly…..the bear camp is neglecting the horizontal support of 89-88 zone. I had noted this even earlier when usd waz at 89 and every one had super bearish targets on the downside….that’s why I had suggested a possibility of usd making a counter rend move to 94-95.
The black MA on the chart is a 20QMA….placed now at 94….any close abv should be viewed as an important development in the near term. Then in all probability a move to 98 will become live. That would be detrimental to risk assets.