To buy or not to buy?! …This is the question.
I’m amazed by how many people are implying that they know what the market is going to do next. In this market like in life, it pays to know when to stop, slowly back up, rethink the plan and regroup.
Before I go any further you need to understand 2 things: First – the bull market that just ended was one of the strongest and longest in history. I understand that the last decade was influenced by the rise of technology like not any other previously but still…the move from last quarter didn’t make much sense. Two – what happened in the markets since COVID-19 affected the world are some unique market moves. Or, statistically speaking, it’s an outlier move.
To understand better what I’m trying to say, take a look at the chart below
Now that we agree, an outlier move, by definition, is an uncommon event. An uncommon event must disrupt the plan one had until that moment in time.
The magnitude of the move was compared, at the beginning with 2008 move, later with 1987 and more recently with the great depression move from 1929. Who knows maybe this one it will be known as the worse one ever. I mean in 2008 the market crashed 47% in almost 1 year and a half, now the market crashed more than 30% in less than 2 months.
So, everything you think you know, forget about it. As a joke, if I may, in 2008 people lost their homes and today the same people are forced to stay inside their homes. Our way of working, of traveling, of thinking about many things directly related to the COVID-19 virus will change and that will have an impact on many economic sectors.
History has many lessons, one of them is that this week’s move was just a bull trap. If in normal times early adopters are recompensated, in times of economic crisis and recession there is a high chance that they will get slaughtered.
The chart below shows how the human mind works. In every recession there were enough people who thought we hit the bottom, the market is too strong and this is just a retracement and we are still in an uptrend. So, at this point, all we can do is to learn from past mistakes.
One could argue that these apocalyptic times we live are already priced in and with the United States and Europe’s stimulus packages we passed already what’s worse. This could be true but despite this, another scenario could be that unemployment probably will continue to rise, while earnings will most likely continue to fall and the stimulus package will not help that much the areas and the companies which are in the oil industry for example. I admit that I expected the market to drop big time yesterday once it was reported the highest unemployment in history and with US being declared as the nation with the highest confirmes number of Corona virus cases, while in Spain and Italy the virus spread is far from being contained. Just to see the marked pushed up by stimulus euphoria. But the euphoria has a short life span. So, for now, my opinion is that despite its size, this stimulus package is just a patch on a big wound and the downtrend will continue.
I’m more than happy if I’m proved wrong. Thanks to tastytrade for the images.