|Where do the major stock indices go from here?
Has most of the damage been done or is there more pain to come?
Here are two possible scenarios from a closely-followed market analyst.
by Javed Mirza and Sienna Wong, Canaccord Genuity
David versus Goliath
In our view, a move into bear market territory (-20%) by the bulk of the Goliaths would constitute an attractive long-term entry point, with the caveat that this is within the context of a secular bull market in equities.
If equities are entering a new secular bear market, we are likely to see a repeat of the 2000 – 2002 Technology Bubble, which suggests avoiding growth stocks, as they could see another 30% downside from current levels.
Although most Goliaths have reached this key bear market threshold, a move by Apple Inc. (AAPL) into bear market territory would strongly suggest a four-year cycle low was developing.
During a four-year cycle reset, high growth stocks typically enter bear market territory (-20%).
We recently highlighted short-term (one-two week) counter-trend bounce targets on the Goliaths, namely Apple Inc. (AAPL), Amazon.com, Inc. (AMZN), Meta Platforms, Inc. (FB), Alphabet Inc. (GOOGL), Netflix Inc. (NFLX,), and Tesla Inc. (TSLA).
Year-to-Date return of the eight largest stocks (Goliaths) in the S&P 500:
Source: FactSet, Canaccord Genuity Research
Two scenarios: Our base case remains the “Ripping off the Band-Aid” scenario.
However, ongoing strength in Yields and Commodities through the summer would shift the probabilities in favour of the “Battling the Bear” scenario.
The “Battling the Bear” scenario would be consistent with the 2000 – 2002 Tech Bubble and implies a shift into a secular bear market for equities.
Two Paths as the four-year cycle reset gets underway (updated probabilities):
Battling the Bear: 35% – This scenario would be confirmed by a close below the four-year moving average on the S&P 500.
We would be watching for ongoing strength in Commodities to confirm a shift into a secular bear market in equities.
The length of a four-year cycle reset during a secular bear market is around 76 weeks, while the average price decline is around 34%.
The last two secular bear markets in equities, from 1970 – 1980 and 2000 – 2010, coincided with secular bull markets in Commodities.
Ripping off the Band-Aid: 65% – In this scenario, weakness over the coming weeks leads to a failed retest of the recent lows.
A move to new price lows on the S&P 500 would strongly suggest that the four-year cycle reset was taking hold in terms of price.
This would suggest a 15% correction, and the technical trigger we are looking for would be the S&P 500 touching 4,077.
Although we have moved below the 4,077 threshold on the S&P 500 our technical work continues to suggest caution and that more near-term downside is likely through the summer.
Our technical work suggests this is an attractive long-term entry point and would likely mark the start of a new 4-Year Cycle.