Recent Market Pullback Providing Opportunities for Investors
We may not want to always trade like institutional investors do, but sometimes it pays to think the way they do, and even follow them as they look to buy the dips we’ve seen lately.
Whenever we see markets sell off, like we did in February and March, the first thing we need to do is wait for an inflection point where things start to turn around. On the way down, we don’t want to even be thinking about trying to quantify the move in terms of how much we think is appropriate under the circumstances, but once it is over, when the fear that drove the market down so much eventually subsides, this is where we need to assess the role fear played in it and view the situation from the perspective of the opportunities that may be present.
When markets undergo big moves down, we can separate the influences of deteriorating fundamentals and the effect of what we could call declining market confidence, where we look to determine how much the market should have declined based upon the facts, how far we would think we would have gone without the influence of fear and downward momentum, where the difference becomes the oversold part that we will look to capture once things settle down and we do get to the point where we are not acting under such fear and people aren’t just continuing to bail as prices go lower and lower.
The coronavirus selloff ended up being as fear driven as you will ever see, in large part due to the media’s incessant exaggeration of this threat that had people worked up into such a frenzy and seeing such doom on the horizon. They only showed us the ugliest of views and kept everything out of sight, including many scientific papers that have been published since that view our response to this as sheer insanity that has visited much more harm upon us than the virus itself.
Although you would never know it, there have been some very intelligent people who have looked at this from the other side and have come to some very different conclusions, but if people were exposed to these insights and data, this would run counter to the efforts of just keeping people completely dumbed down and afraid, in such an extreme manner that even science fiction from the past would not have dared imagine.
The media simply locked out any views that opposed the prevailing mass paranoia that they promoted with such zeal, which even spilled over into social media where opposing views were censored and even search results became altered in favor of keeping the truth from us. Bangladesh has even gone as far as putting people in jail just for social media posts questioning the official approach and viewpoints. Not many people know where to look to find the wider sampling of scientific opinion out there, such as academia.edu, and the project of keeping people so in the dark and just showing them horror movies 24/7 worked amazingly well.
There was no question though even in the earliest stages that the sheer panic that the world was in was very overdone, but we can also thank this situation for helping create the extent of the opportunities. The darker the skies become, the more impactful the light of day becomes when the sun finally does rise in contrast.
We sought to provide a more reasoned approach to this crisis right from the start, and while writing so much about a health crisis is not something people would normally expect from a financial site, we do stand out by going into not just the what of things but explore the why in considerably more depth. Given the impact of this on the markets, it wasn’t even possible to chart a good financial course during these times just by allowing the winds of paranoia to guide you without at least a decent understanding of what was really going on and what to really expect.
We weren’t just going to be a willing participant in this Orwellian project, one that Orwell himself could not have even dreamed up, and while people always need to decide for themselves, they cannot make the right choices if they don’t have all the facts, and especially if the facts that they are allowed to see are so biased and distorted. So many were though, and the great harm that has been thrust upon us that we were so well conditioned to accept has not been fully revealed yet, although we expect this will remain well hidden even when it’s all over.
Professor Carlo Caduff of Kings College London offers a very insightful analysis of this nightmare in a recent paper entitled What Went Wrong: Corona and the World After the Full Stop, and while medical anthropology has little to do with finance normally, it sure does this time. Economics is what was held hostage and tortured during this ordeal, and the pain won’t all just go away when we let it out of jail. They don’t want us thinking about such things at all, but plenty in the now dark alleys of academia from a number of fields of study are willing to still think.
This nightmare caused the ratio between dark fantasy and reality to rise to extreme levels, where the visions of doom that pushed us down so far provide much more short-term potential for growth than you ever see in these scenarios. The coronavirus panic that hit the market was so disproportionate that it created a singular event, a once in a lifetime opportunity to play a bounce off a crash that was simply so out of line.
The 40% rebound that we ended up seeing between late March and early June was testimony of this, packing several years of the more pedestrian growth that the market sees in more normal times into a very brief period of time.
We might be thinking that the fun is over, but we are now seeing a second wave, not of infections but a second wave of paranoia. While it did take some insight and awareness to calculate the degree of paranoia the first time around, instead of just accepting what we were told and not thinking about it, this latest paranoia pandemic should be far more transparent, relying on the claim that infection rates are increasing now and that we better beware of another shutdown.
This one is purely stupid, because infection rates are going down not up, which is plain to anyone who cares to look. If you just let the media do all your thinking for you and just nod along, it doesn’t matter how much it flies in the face of the facts, although this current scare deviates from the facts so incredibly that it defies belief.
This has made its way into the stock market as well, as we ended up selling off by 10% at the worst of it due to worries about purported rising infection rates. The infection rates themselves are still declining more and more, where at one time 19% tested positive in the U.S., and this has declined so much that the overall rate has now dropped to 9%. The rates with recent testing are much lower than this as you don’t go from 19 to 9 with a rate of 9, it requires one much lower.
Imagined Second Waves Still Can Pull a Lot of Weight it Seems
Somehow, incredibly, this is seen as a second wave, although you can come to that conclusion if you just hear that it is and believe it. We don’t even have to account for the increased testing we’re doing now, we can just look at the number of cases itself, no math required.
The 7-day average of cases in the U.S. peaked on April 10 at 95.96 per million people, and has been dropping ever since. We’re now at 65.42 per million even though we’re now testing many more people per day than we did back on April 10. This number is not spiking, it is continuing to go down.
What is even funnier is that people are also freaking out about the pandemic emerging again in China, and in a country of 1.4 billion people, where less than 50 cases a day qualifies. This is another reason why people are becoming scared now, and if we pro-rate that to the U.S., this works out to about 10 cases on a bad day.
It’s no secret that this virus is persistent, although there comes a point where the numbers become infinitesimally small, and whatever happens to just 50 people in a day in China just does not mean anything overall. Those who are mad enough to be concerned about this will find solace in the numbers going down from 57 to 45 to 40 over the last few days, so the microscopic second wave is waning.
If this were a movie, where the scientists were claiming that we need to panic about infection rates rising while they are dropping this much, people would just shake their heads and walk out. When this movie plays in the media though, and you can get people to suspend their judgement so much that they buy this fraud, they will keep watching and believing.
Just like the first time around, if we’re aware of how crazy this all is, this fear will present yet another opportunity to arbitrage stupidity and look to capture the rebound as we come to our senses more. This one won’t last long though as it is so much more obvious than the first time where we actually had to think a little rather than just being able to read, and might be turning the corner already in fact.
Delusions Can Be Pretty Profitable for Stock Investors
Stocks trade on the futures market during off-market hours, which only take a break on the weekend, between Friday night and Sunday night, and the off-hours traders in Asia and Europe are particularly sensitive to fear. During the height of the sell-off, this market was regularly tripping the 5% halting trigger and often would do it fairly early in the session, back when the number of cases were increasing and off-hours futures traders were in a constant state of panic.
This was particularly evident during the Sunday evening and early Monday morning sessions, where they would see the extent of the increase in cases over a weekend really scare them. The regular market would often look to correct some of these moves, seeing it as an overreaction, and we even saw some of this during the worst of the decline.
While trading in New York concludes, the futures market for stocks, like with forex trading, relies on other markets in other areas of the world to provide continuity. Markets on the other side of the world take over when New York wraps things up for the day, in Australia and Asia, followed by Europe in the middle of the night who takes the ball and runs with it until New York opens up again the next morning.
The Asian traders hammered the Dow overnight, putting it down by 1000 points at the time that European markets started to wake up, which didn’t quite hit the 5% limit down but did make it to 4% and limit down was at least in the conversation depending on what European traders wanted to do.
Europe did come to a more reasonable conclusion that this brewing fear of rising infections just wasn’t something that we need to be that worried about this much, and by the time New York opened, they erased half of these losses and set us toward correcting this. Not surprisingly, New York, being less prone generally to overdoing the panic than traders from elsewhere are, picked up on this and continued down the road to recovery from this.
The fear that the market has here has everything to do with the potential for further business contraction, whether that be from imposing another lockdown of sorts or people just becoming that more reticent to do business, and it then just becomes a matter of seeing how unreasonable these fears are to want to start beating the drum of recovery again.
The bears will always be with us, and there are some people out there who are still calling for our dropping all of the gains we’ve put in lately and then some, but there are always differences of opinion in the market and we need to go with the ones that make the most sense.
The S&P 500 going from the around 3,000 that it is now, breaking through the roughly 2,200 that it bottomed at in March, all the way down to 1,600 is possible, as anything is possible. It’s just not reasonable, and we always need to let reasonableness be our guide when investing.
The New York market did end up picking up where the European future traders left off, and regained the other 500 points of this 1000 point down move and then some. Clearly, it takes more than this to have the market lose its mind for too long, and we’re already looking to cut into some of the losses from last week that this temporary insanity caused.
Those who were around to trade in the middle of the night could have gained almost 5% from then until the close, and even just jumping on at the open on Monday could have made some real nice gains for a day’s work.
The word on the street was that after pulling back as much as we did, the institutions were now seeing this as not a risk but an opportunity, and just like when the fear died down in late March, they are swooping in and buying this dip, because it’s really a non-event. The less a dip is grounded in substance, the better, and this one was groundless so you don’t even have to wait for the event to resolve because there just isn’t a real one going on.
This has caused the real rebound plays such as the JETS ETF that tracks the major airlines to take a step back as well, and there’s now over 20% of room between here and the high of just 6 trading days ago. Nothing has really changed since June 8, other than our staggering a little, but as we get back our footing and clear our heads after they struck cement, this is exactly the sort of stock that takes a hit when we do and there’s even more room on the journey back to where we just were.
Hertz is down to $1.88 now, and our telling you to head for the exits on this one when it was a lot higher not long ago was not a drill. They may be fine, but there’s too much up in the air and too many other stocks that don’t have to worry about being delisted to ever want to be in this bad spot.
Disney added a couple of bucks to their share price Monday, outperforming the market, and there’s still about $10 to go with this one to get even with June 8. That’s almost 10% and for those who missed out on it with our earlier call at $100, the opportunity here is not over and they are going higher than this as we put the last of the paranoia behind us and get back to a lot more normal.
Disney is another stock that took more than its share of pain due to worries about the virus. This second wave of panic may not have amounted to much but did set the stage for some easy double figure returns very quickly, more than the entire yield you would get with a 10-year treasury over the 10 years.
This bond play actually is considerably riskier than this stock play, due to the price of bonds being subject to some serious decline over this time, and you’d be lucky not to be down money in 10 years with this. Better to pocket even better money very quickly and then decide if you want to go for more, and this stock can definitely do more if held longer.
The amount of brainwashing that people have been subjected to lately is simply incredible, but if yours avoids the electrodes, and you can see through these things, that can put yourself at a real advantage. We’ll be rid of all the puffed-up monsters eventually, or we at least hope so, but they do make for better eating for us, and there’s still plenty of very good eating to be had even this late in this fearmongering charade.
Editor, MarketReview.com
Eric has a deep understanding of what moves prices and how we can predict them to take advantage. He also understands why so many traders fail and how they may help themselves.
Contact Eric: eric@marketreview.com
Areas of interest: News & updates from the Commodity Futures Trading Commission, Banking, Futures, Derivatives & more.