Market Sending Mixed Signals:
Coronavirus and Other Risk Factors Remain
Many times, there is extreme uncertainty when it comes to market sentiment. For an investor, this could be quite confusing especially when analyzing the financial markets and attempting to predict future market movements. However, times like these can also provide lucrative opportunities for those who are savvy. With the recent market turmoil from the worldwide economic crisis caused by the coronavirus pandemic, trade conflicts and social unrest, now may be one of those opportunistic times in the markets.
Risk of Downturn in Stocks After Recent Recovery
The global economy saw a massive downturn due to the COVID-19 crisis which caused the economy to basically stop. This resulted in massive unemployment, financial insecurity and plummeting consumer confidence, affecting the most impoverished communities worldwide. However, there are now indications that the economy is starting to show signs of recovery. Markets have reacted to this with stocks appreciating rapidly and investors quickly abandoning safe-haven assets, such as the US dollar. On the other hand, there is still a serious risk which continues to persist in the markets, despite the recent positive sentiment in stocks and other markets. This could prove to be a profitable short selling opportunity if it turns out that the market is overly optimistic on the future of the global economic recovery.
Second Wave of Coronavirus Can Result in Panic Selling
One of the major risks facing the economy is the potential of a second wave of coronavirus infections in the U.S. There have recently been signs of a resurgence following numerous states beginning to “reopen” their economies. Also, the recent mass movement protests against police brutality perpetrated on the Black community in the U.S. may have caused more spreading of COVID-19. The potential for another nationwide shutdown, or even just the shutting down of some larger states, could wreak havoc on the stock market, resulting in panic selling along with a rush to safe-haven assets, such as gold, the US dollar or the Japanese yen.
Short Selling Opportunities
How you respond to this potential risk will depend on whether you have a short-term or long-term trading strategy. In the short-term, you can continue to ride the appreciation in the market and maybe take some risk off the table, while keeping an eye on the latest developments regarding coronavirus. Those who are more aggressive can also consider short selling the dips.
Long-term View, Buy and Hold
On the other hand, those with a longer investment time frame can view the decline in the markets as an opportunity to buy the dip and to add to their long-term positions. Given that on a larger timeframe view the market is still well off historical highs and continues to hover near all-time lows, buying and holding for the long term is far from irrational. You could stand to earn massive capital gains if stocks reach anywhere near their historical highs.
Along with taking advantage of a potential future decline in stocks, you may also want to take a look at safe-haven assets, especially if you have yet to add any to your portfolio. Safe-haven assets, such as gold, gold miners ETF (GDX) and Japanese yen will tend to, in the longer term, appreciate as the broader stock market falls. However, many times in the short term, the inverse correlation is temporarily reversed, which means a safe-haven asset will also depreciate along with the stock market, presenting a buying opportunity which could pay off in the long term.
Fear is the main driver of appreciation in these safe-haven assets and there is plenty of fear to go around in the markets nowadays, not just with coronavirus. Continuing trade tensions between the U.S. and China, the upcoming U.S. Presidential elections and continuing social unrest in the U.S. and worldwide are all contributing to market sentiment unease.
Time to be Vigilant and Be Ready to Act
Despite the current market volatility, the fact is, there is no guarantee that the market will actually decline precipitously due to a second wave of the coronavirus. Many market sentiment measures show that the overall market is confused about whether to be bullish or bearish on stocks. The Citi Panic/Euphoria Model, BofA Bull/Bear indicator and the CNN Fear & Greed Index are all pointing in different directions, suggesting the market is evidently confused about where to go next. Therefore, it is best to pay close attention to the stream of news regarding the latest developments in the coronavirus as well as the other risk factors. This will ensure you will be ready to act when the market conditions fit your trading strategy and goals.