Investors are Freaking Out. What Should You Do?
Right now I get the feeling that investors are starting to freak out. Financial news and social media streams continue to be filled with very negative scenarios. As you can see the CNN Fear/Greed Index is about as bearish as it can get.
The volatility index (VIX) tells a similar story and is trading at levels not seen since the financial crisis in 2008. This tells me that regardless of where we end up it's going to be a bumpy ride in the near to medium term.
I don't know where and when stocks will bottom. No one does. Don't let anyone try and tell you different because we will only know in hindsight.
Maybe COVID-19 continues to spread creating more fear and causing further damage to economies around the world. Maybe it starts to subside and the fear goes away?
The market is forward looking and will continue to try and process the news and the potential impacts to the global economy. Are the economic impacts worthy of a 20% correction? Or maybe a 30% correction or more?
No one likes uncertainty but this is the world you have to operate in when you're an investor or trader. The "unknowns" are always present and right now there are more than usual.
Stocks overall have plunged lower in a very short amount of time. However, some are down a lot (oil/energy, hotels/casinos) and some are down not that much (big tech & biotech).
Right now the S&P 500 is down approximately 19% from it's highs. As a long term investor this should be expected and shouldn't come as a surprise.
I think it's safe to say that the current area (2700/2750) in the S&P 500 is worth paying close attention to. It has provide support a couple times in the past and it might provide some temporary relief.
If we can continue to trade above 2700 and the virus concerns subside that would be the best case scenario. If we can't stay above that level then the next obvious area of potential support is the 200 week moving average around 2600. As you can see above we bottomed at the 200 week moving average in December 2018. Maybe it will support prices again.
I think the best action is no action for the majority of investors. Volatility will continue to confuse the majority of participants by creating fear and excitement with every wild intra-day price swing or gap opening.
If you are overweight equities the oversold rallies are a good opportunity to lighten up and raise some cash. Selling into the extreme down moves when the VIX spikes and chasing the big rallies is not what you want to be doing.
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