Just two weeks ago, stocks were hitting all-time highs. Last week, markets caught the coronavirus. Unfortunately, once fear takes hold, it spreads quickly – much like the virus itself.
Fear has overtaken traders
We talked recently about the strong performance from 2019 spilling over into 2020. But that was before we faced a global pandemic. With the virus spreading around the world like wildfire, most investors are being cautious and proactive. In some cases, investors are veering into downright panic.
You can clearly see the fear in this week’s market action. The drop in the Dow Industrials is one for the record books. The Dow lost nearly 4,000 points and stands more than 10% lower than its all-time highs. By any definition, that is a correction. If this continues, we could veer into a bear market. Note I said “could” – we are definitely not there yet.
There is some good news: The froth in the markets has been completely wiped away. The wild speculation that was flowing into names like Virgin Galactic and Tesla has been wiped out. Stocks were pounded once uncertainty took hold. Just look at the VIX. It shot up to 47 overnight on Thursday into Friday – its highest level in two years.
If you weren’t already circling the wagons “just in case”, it will now come at a cost. Protection has become more expensive as investors scoop up index puts.
What the technicals say
So what do the technicals say? The McClellan oscillator, the VIX and the put/call ratio all signal a deeply oversold condition that will likely lead to a massive market squeeze higher. That’ll be tough to latch onto. High VIX readings also complicate matters, as it means we’ll see wider ranges. Just as the SPX 500 has moved down 100 points, it will move 100 points, too.
A move up is not an “all clear” signal. The markets have yet to set a new trend. Until fear and uncertainty exit stage right, we will have to contend with more fear – and more selling.
