Stock Market Relief Rally Is About To Crash, Warns Prescient Hedge Fund

Flush with fiscal and Federal Reserve stimulus, equity bulls have put up a stunning rally. Meanwhile the slowing growth of new coronavirus cases is brightening the outlook too. In 16 trading days ending last week, the S&P 500 Indexed retraced roughly 50% of its losses since its Feb. 19 all time high level of 3,393.52.

But in a dismaying Q1 letter to investors, Crescat Capital warns the stock market relief rally has topped out. The award-winning hedge fund’s macro model shows no economic recovery any time soon. And the corporate multiples Crescat uses to assess valuations indicate the stock market is still historically overvalued: We strongly believe that investors should be wary of getting sucked into the relief rally. Valuations are still historically high for the US stock market at large. Our macro model does not forecast an economic recovery any time soon.

Indeed, the hedge fund’s analysis of corporate multiples in January revealed an imminent end to the record expansion. Crescat predicted a correction just as the market peaked. All eight fundamental indicators raised major red flags for the stock market:

At the end of January, Crescat warned that the median Enterprise Value (EV) to sales ratio for eight of 11 S&P 500 sectors had reached “an insane, euphoric level of 3.6 times, two times than the tech bubble peak.”

It’s not about COVID-19. That was merely the catalyst for a stock market correction already in motion. Coronavirus was just the spark.

We expect the bear market to fully resume as soon as this week with the Q1 earnings season kicking off with a spate of grim reports. Plunging corporate earnings are not likely to be shrugged off this time.

Stock Market Relief Rally Is About To Crash, Warns Prescient Hedge Fund, CCN, Apr 16