Rhyming
Disclaimer: this is not investment advice. Before taking any investment decision, do your own research.
In the last post on August 9, I mentioned that by comparing to the 2007–2009 financial crisis one could argue that too much complacency could be harmful.
The comparison then, based only on marking significant drops and rallies, showed August 15th as the end of the first rally using a similar timeframe of 2 month rally after 5 months initial drop. The rally ended on August 16th.
This coincidence made me wonder where would the current bear market go next if it tracks the 2007–2009 drawdowns and rallies timeframes as well as it did so far. The following table shows the behavior until 2022–08–16 and what would happen if it keeps tracking dropdowns and rallies in similar periods and percent than 2007–2009.
The next bear market rally would start about October 10th and it would last about one month. After that, we would have the largest drop in the bear market.
Of course there’s little chance that the timings keep as close to the 2007–2009 period as it has so far. But the fact that it’s been as close so far makes me wonder what reasons may there be behind these commonalities. So far it seems that we are in an increasing uncertainty period after a large “exuberant” period (aka bubble) very similar to the housing bubble and bust. The driving markets are different (housing then; crypto, growth, tech and “almost everything” now) and the triggering events are clearly different (Bear Stearns collapse in 2008, Ukraine war and inflation now,) but the time it takes to process the news and take the markets down is similar.
Should we expect the similarities to continue? I don’t think timing will match from now on. But we may have something similar to the 30% drop from August to October in 2008. Triggers may be:
- A large bankruptcy in the USA that starts “contagion fears.” This seems less likely since financial companies are healthier than 2008, but can’t fully rule it out.
- An escalation in Ukraine that increases fears of war spreading to the rest of Europe (or the direct involvement of USA or China in the war.)
- Very bad USA economic data that spreads the fear of a long recession or even depression. This risk is increased by the limited tools available to the Fed and Treasury for stimulus because of fears of stagflation.
- A currency or sovereign debt crisis of one of the “solid currency” countries (Germany, France, UK, Japan, China, Switzerland.) I haven’t checked how likely this may be, but with the levels of volatility that we are seeing right now and disruptions in global supply chains, I wonder if this is on the table.
The other side of the coin
The alternative to a stronger downturn is that the bottom is (almost) in. So far we have experienced a double bottom which could indicate the end of the current bear market. Even if it keeps going a little lower, unless there’s much stronger drop the perspective of “being done” is clear possibility. Sadly, since there’s little hope of clearing some of the threats hanging over the market for the near term, even if they go up from now on, it will likely be in a choppy, whipsaw way. With pain guaranteed to both bears and bulls.
What about Tesla?
For Tesla we have a different story. We are again at a point, like in 2019, where recent investments are about to trickle down into earnings and new products and markets open up as possibilities. Although I don’t expect a similar 20–30x jump, Tesla may end up doing a 3–5x in the next few years while analyst and the markets as whole digest this new reality.
This may be postponed by a strong downturn in the general markets. But even in that case, Tesla will likely outperform its historical beta performance by a stretch, and when the markets start rallying Tesla will bounce up like a spring with all the accumulated momentum.
We may still see a drop down to the 200s level before any consistent rally, but the risk/expected returns favors the upside by a large margin.
Some triggering events:
- Berlin and Austin ramping up to 500k/year rate at a surprising speed.
- Start of Cybertruck deliveries with good reviews/teardowns.
- Rating agencies increasing Tesla’s ratings to investment grade (which I expect before end of year.)
As always, this is not investment advice. Do your own research, check my expectations with data and be careful with using margins and other leveraging tools. The current markets are very volatile and specially hard to time.
