This market rally won’t hold, Industrial Alliance Securities says

Don’t get too excited about this market rally, there is more pain to come.

That’s the conclusion from Industrial Alliance Securities when it comes to bearishness in the markets in the midst of the economic collapse that is COVID-19.

In a report delivered on Wednesday, Industrial Alliance Securities analyst Joe Farrell said the recent rally is likely to be followed by another downtrend that will test and probably break through lows set last week.

Markets finished two strong days on Wednesday, the first back-to-back gains in over a month as investors poured back into equities in response to positive news of a major financial aid package from the United States government.

The Dow Jones Industrial Average closed up more than two per cent on Wednesday following a record 11 per cent boost on Tuesday, while the S&P 500 was up a combined 10.5 per cent for the two days.

The tech-heavy Nasdaq Composite was in the negative on Wednesday, down 0.5 per cent, as the FAANG giants closed lower, while the S&P/TSX Composite finished up 17 per cent for the two days.

But there’s still a long way to go to repair the damage wrought by weeks of negative sentiment as fears mounted over COVID-19 and its impact on economies worldwide.

Even with its impressive gains this week, the TSX was still about 26 per cent below its high set on February 20, and with health experts predicting not only months still to go in the current pandemic but also the potential for more waves of COVID-19 coming in the future, prospects that markets will soon return to prior levels are looking dim.

Farrell studied the global macro technical outlook for the second quarter of 2020 and found bearish signals abounding and compared the current collapse —the fastest bear market in history— to the financial crisis of 2008.

“The key question for equity investors is what the magnitude of the bear market in both price and time will be,” said Farrell. “The majority of the monthly charts we highlight across global equity markets and North American equity sectors are reversing multi-year bullish trendlines and exhibiting technical characteristics similar to those seen in 2008.”

Farrell said most global currencies look to have plenty more downside potential relative to the US dollar, while commodities other than the precious metals are also showing signs of more pain to come.

As for equities, Farrell said there’s indication of more downside, despite this week’s market rally.

“We believe that bearish sequences unfold in three acts, or as technicians label an A-B-C pattern,” Farrell said. “We believe that we have likely reached the bottom of the initial A-leg down. A vigorous relief rally or B-leg can see a third to a half of the A-leg recaptured.

The C-leg down should at minimum test the A-leg low and in our opinion has a strong chance of breaking it.”

For the Nasdaq Composite, for example, Farrell noted the monthly relative strength index beginning to slip below 50, which has happened most recently during the 2000 dot-com crash and the 2008 financial crisis.

“The current health, economic and financial crises will ultimately work their way to conclusion. However, our belief is that consensus continues to underestimate the potential magnitude of this bear market in both price and time,” Farrell said.