In life, timing is everything. The coronavirus pandemic (COVID-19) has brought unforeseen societal and financial challenges to the world ― is the worst over? Is now the time for buying stocks? In this blog, we’ll take a look at the long-term picture facing U.S. equities and if it’s time to go all-in or fold.

March has been a devastating month for long-term equities investors. The Dow Jones Industrial Average DOW and S&P 500 SPX have both shed more than 30% from mid-February’s all-time highs. No doubt about it, if you were buying stocks six weeks ago, the damage has been severe.

Of course, in every financial catastrophe, someone gets a great deal. One year ago, buying Boeing (BA) shares at $95 was a pipedream; on 20 March, it became a reality. The trillion-dollar question is this: are we in for a broad-based rally in the U.S. equities markets? Technically, no. Fundamentally, maybe. 

A Technical Look At The DOW

Below is the monthly chart for the DOW. It gives us a good look at the 3 ½ year “Trump Rally” in U.S. equities. While many prefer the S&P 500 because of its larger scope, the DOW will work just fine for our purposes.

Since Election Day 2016, the DOW’s positive months have outpaced negative months by better than a 2:1 clip. However, the past two pandemic-driven red candles represent an epic market correction. So, has the DOW bottomed? A few observations: 

• Technically, the COVID-19 downtrend is still valid. The DOW remains beneath the 38% Fibonacci Retracement (22,551), indicating that a bearish bias continues to be warranted.
• The area just above the November 2016 Low (17,883) brought bidders out of hiding in mass. Why? Initially, the 18,000 handle held up as a big-round-number, drawing both technical traders and bargain hunters into the market. After that, participants continued buying stocks for two reasons ― FED quantitative easing (QE) and a titanic U.S. government stimulus package.

From a technical standpoint, it’s still too early to bet big on a DOW recovery. However, the fundamentals paint a different picture.

Here’s Why Buying Stocks Makes Since

Drastic times call for drastic measures. Since the COVID-19 outbreak reached biblical proportions in early-March, governments and banks around the world have pushed the panic button. Have they been able to stop the bleeding and restore order to the world’s financial systems? Judging by the 2500+ weekly gain in the DOW (23-27 March), it appears that the efforts may have been successful.

From a fundamental standpoint, here are a few reasons why buying stocks now makes sense:

• Government Stimulus: There’s not much point in arguing that the U.S. $2.2 trillion stimulus package will boost the economy in the short run. However, it’s important to realize that this may be only the first in a series of bailout packages. U.S. equities stand to gain if we see one or two more stimulus bills passed this year.
• QE Unlimited: The U.S. FED has adopted a brand-new policy dubbed “QE Unlimited.” Under this approach, the FED is free to extend credit and purchase assets as they see fit. Jerome Powell and the FOMC are now the “lender of last resort” to banks, businesses, and possibly individuals.

So, what does it all mean? Ultimately, it means that governments and central banks have pledged unlimited liquidity to the credit, debt, and equities markets. Fundamentally, corporate stocks and the U.S. indices are poised for a swift recovery.

Bottom Line

Of course, things don’t always go as planned on Wall Street. While buying stocks at huge discounts is an ever-attractive proposition, timing is everything. Is now the time to buy stocks? Not yet. Here’s why:

• Bankruptcies: A rash of corporate restructurings and bankruptcies are undoubtedly right around the corner. Any company that was highly leveraged going into the COVID-19 panic, and unlucky in the stimulus sweepstakes, will be left out in the cold. There are more than a few of such issues on the S&P 500, specifically in the energy sector.
• Technicals: The probable technical scenario for U.S. stocks and the DOW is to enter a period of consolidation. If we don’t see a late-March/early-April rally above the 38% COVID-19 Retracement (22,551), the downtrend is intact. Thus, another test of the 18,500 area is likely in the cards.
• COVID-19 Fallout: We simply do not know when the COVID-19 pandemic is going to recede. If the situation continues to degrade into late-April, then another wave of selling is likely.

If you’re interested in buying stocks, focus on those that had solid debt ratios back in January. Also, companies that are positioned for the cheap government/FED bailout money are ideal. It may take a while, but these types of stocks have a good shot at recovering fully in the next 24 months.

If you’re interested in going long the U.S. indices, trade location will be everything. While recovery and rally toward February’s all-time highs is likely at some point, the path may be chaotic. For the DOW, a retest of the 18,500-17,500 area will give us a premium bullish entry.

Remember, it always pays to trade the fear of missing out for great market entry ― caution is indeed a good word.