The S&P 500 is indicated to open down around 5.5% about three hours before the opening bell in New York. This will undercut the low hit on February 28, but a substantial margin and also breaches some of the support levels that developed back in August. There is little in the way of support at this point, but when the market sells off this aggressively, this quickly, support levels don't tend to be very meaningful.
The news headlines are that the spread of the coronavirus and a war over oil prices enacted by Saudi Arabia are causing intense selling. Oil took a hit of 25% and there are fears that the drop will lead to debt defaults across the sector.
The real problem here is that there is massive uncertainty about how this will play out and that it may lead to a worldwide recession. A number of Asian stock markets have already fallen more than 20% and are now in what is what is technically defined as a bear market.
It is important to understand what is happening to the stock market and why, but it is even more important to develop a strategy for dealing with it. It is particularly important to be clear about your trading and investing approach. Longer-term positions are likely to rebound over time, but it will take time and won't occur quickly or easily.
Markets that fall this fast almost always see a bounce, but this is not a situation that is likely to lead to the V-shaped bounces that have bailed out bulls so many times in recent years. The catalysts for this drop are quite different and it should be readily apparent that even the dovish central banks are not going to find it easy to support the market.
U.S. markets are now anticipating that the Federal Reserve is going to cut rates to zero. There is a Fed meeting coming up soon and there is little question that there will be more cuts announced. As we saw on the Fed's recent half-point cut, the Fed is causing more panic than confidence as throwing cash at the market is not fixing the underlying problems that are building.
It is likely that the U.S. Treasury Department will be looking for ways to support the market with fiscal moves, but if the economy is falling into a recession as feared, it is going to be a process that will take some time before the market finds a bottom.
The best approach right now is:
- If you have long exposure don't rush to sell into this open. Wait for some stabilizing and then make decisions about stocks. It is never too late to sell. You can always buy back positions and it is perhaps good strategy to move into different stocks as you look for a market recovery.
- Don't anticipate a V-shaped bounce this time. While a countertrend bounce is very likely to occur, especially if there is some fiscal or monetary policy moves, there is a major downtrend now in place and it is going to take time for the market to find its footing. The risk of a failed bounce at this juncture is very high.
- This is index driven action. Stocks will mostly move in tandem and there are no safe havens. Once things calm down, there will be a good opportunity for individual stock picking, but move slowly in building new positions.
- Read my weekend article, Buying Stocks in a Downtrending Market: Better Late Than Early. In order to better navigate the action in a downtrend, it is important to understand the psychology that develops.
- Maintain a positive mindset. While it is nearly impossible to avoid losses in the near term if you have any long exposure, this action is going to lead to some exceptional opportunities over time. Make sure you protect capital as best you can, stay patient and have an opportunistic view of the action
There is some real panic out there this morning and no signs of support so far. This is the worst action since the 2008-2009 bear market and should not be viewed as just a temporary setback that will be quickly forgotten. The shocks and reverberation are going to produce a very unstable environment.
