When all this situation with virus and restrictions started gradually unfold, I was still in Mauritius Islands. On my way back home to Latvia I noticed only few people with masks at Istanbul airport. And no signs of panic whatsoever. With profound sense of “all this is far away from us” (in China) and “it’s just a flu”.
Initially I was holding onto the fact that more people die from seasonal flu each year than this. I even didn’t want to bother writing about the virus because many uses the topic as a clickbait. I had no intentions and desire to feed on that to become one of those “impending crisis preachers”. Internet already is full with troublesome “revelations”, both by industry professionals and charlatans.
But once I gathered enough information and realized that my mom is at risk I became very cautious and started really carefully explore any trustworthy information I could get. You cannot be too cautious if this might affect your loved ones.
Already while in Mauritius, I noticed that the market is starting to behave “abnormally”. VIX (Volatility Index, the real-time market index that represents the market’s expectation of 30-day forward-looking volatility) started to climb significantly at the beginning of the month. That is a strong indicator for me. At VIX 25 I already starting to look at my open positions, trying to reduce risks. But all of the sudden VIX starts to climb, steeply, practically non-stop.
It’s like something we’ve been experiencing in 2008.
Needless to say, be very careful. Under these market conditions, it is better not to trade. If you still want to do it, you have to significantly reduce the risks. The open positions should be with much smaller volumes. It must be considered that the market is in great uncertainty. Small loses at this point are normal. A trader who does not lose his capital at such times is a good trader who understands how to behave under such harsh circumstances.
So, here, as the VIX is already at its 2008 levels, I wanted to look at what's going on with the S&P500. I always look at the S&P500 as a reflection of the economy. What is happening in the economy NOW? Currently the S&P500 experiencing one of its fastest falls. Many countries are introducing quarantine, closing borders, halting gatherings, events, closing restaurants, cafes. The tourism industry has stopped completely. And in most countries all this uncertainty is just winding up. The only ray of hope is China, it shows signs of recovery, giving hope for others.
And if we look at this economic situation in a simplistic way, we can say that in 2008 was a bad economy.
Now there is NO economy! Or, to be more precise, the economy has come to a standstill. All this because of a single virus with no clear forecast how quickly humanity will deal with it.
For those who want to buy stocks now – don’t do it yet. It’s no brainer. The markets need to stabilize first and VIX needs to shrink. The real impact on the economy must be grasped with understanding how countries will stimulate the market and economy. This situation will have a long-term impact, this is way too strong blow to the economy. Many waited for some sort of economic crisis, but no one expected it in combination with the pandemic. To put current situation in prospective, let me show you the image of S&P500 fall in 2008 and a current fall… This is not a forecast, just my point of view and current thoughts on the market as I see it now.
Another "horror picture" that describes the current market sentiment very well (S&P500 performance this month, as of 18 March 2020):
What’s going on with gold? Gold is always seen as a "lifeline" in times of crisis. It's not all that easy either:
As you can see, both in the crisis of 2008 and now gold is falling, and the market is falling as well. I have no real explanation for this. There are different ideas and opinions, but I do not have a precise explanation, so I will not give it out. I just wanted to add that you don't have to buy the gold right away. In my opinion, gold has to climb. But here's, as always, the question of "timing."
Now many transactions are overdue: commodity currencies and commodities themselves have already made significant moves. The stock market has also fallen sharply, bonds have gone up. The US dollar is getting stronger. We have to wait for corrections even though no one has said that market will provide any opportunity.
In Europe, the banking sector is not in a good position. Europe is fragmented, without strong leadership to be able take swift and decisive actions. There’s a feeling that each European country is by itself in this, and, as a result, I don’t see that Europe as an economic entity has clear, positive outcome in the near future.
Don’t panic!
Don’t let FOMO (Fear of missing out) get to you. Avoid “fake news”, “sensational headlines” as much as possible. The information you want to consume must be specifically verified, don’t let emotions and “expert” opinions get to you. Don’t expect easy and fast profits by “buying at the bottom” either. Keep track of measurable economic variables, if you have to trade, do it with as much risk as possible. Follow the situation updates from official, trustworthy sources, keep track of the statistics – what are the trends, what is the prevalence of the virus.
Keep it real!
Keep track of US dollar, EUR (current epicenter of virus), oil and oil correlated currencies, S&P500 and other indexes corrections (if any). And last but not least, keep an eye on BTC! As long as the VIX is at that level, trade it with “tight stops” or don’t trade at all.
Stay tuned!
Agris