Uncertainty is the nature of the world, and 2020 has clearly illustrated that. At the start of the year, the IMF (International Monetary Fund) had forecasted the global economy to grow by 3.3%; but only three months later, the organisation has delivered an updated forecast of the global economy to contract by a minimum of 3%. We are now officially in the period of the ‘Great Lockdown’, where coronavirus financial updates have provided the cue for underlying investor sentiment and inspired spiky volatility in the markets.
The Impact of the Coronavirus
Q1/Q2 2020 witnessed massive volatility in traditional markets as governments across the world implement various measures to limit the spread and ultimately defeat the deadly coronavirus. Lockdowns have effectively shut down economic activity and led to huge job losses that have limited consumer spending. Initially, a Chinese agenda, the spread of the virus across the globe have heightened investor anxiety, which is reflected in the markets.
In the US, 2020 was supposed to be a year of taking out highs. The economy was at full speed and as recently as February, equities were trading at record highs. As investors understood the danger that coronavirus posed to humanity and its devastating impact on the economy, panic selling ensued as equities shed off 20% by the end of the first quarter. It was not a smooth negative spiral; there were huge see-saw swings, with the coronavirus news flow influencing market sentiment by the day. Rising new cases and death numbers sent equities crashing, while any hint of positive data, such as reducing death toll (at home or abroad), triggered cautious aggressive bulls to chase short-term retracement gains in the market.
Where to From Here?
The coronavirus pandemic is unusual because its health implications have completely altered human living and caused economic pain. While the shifting sentiment based on coronavirus updates illustrates that investors are keen to take advantage of short-term trading opportunities, it may also be a case of long-term contrarian positioning in the markets. Investors may view the current pandemic as a chance to buy dips in anticipation of huge gains during the second half of 2020. Throughout history, equities have always been leading the economy; peaking before the onset of a recession and bottoming out before a recovery kicks in. But how low can we go from here?
Not so far, considering equity markets are now staring at losses of almost 30%. Despite the sharp losses, investor confidence suggests that a bear market is not yet in place. The sharp rebounds after every major fall are evidence of this. Still, it would be extremely dangerous to hunt a bottom during a pandemic that has no clear end in sight at the moment.
A more prudent strategy would be a short-term news-following strategy, particularly coronavirus updates in worst-hit regions such as Italy, the US, Spain, UK and France. Negative data, such as rising death numbers and positive cases, would activate panic selling and send prices on a dive; but any hint of positive news, such as reducing death numbers and positive cases, will trigger a pullback move that will almost fade the entire negative fall. Still, the ultimate bullish trigger will be a vaccine and resumption of normal economic activity. But if you wait till then, you will almost certainly be late to the party.
There are however some dangers to buying short-term price dips to fade panic selling moves. The quick moves require multiple trades throughout the day, and this will increase trading costs that will impact your overall profitability. Thus, probably the cheapest way to try and capitalize on these speculative trading opportunities would be via CFD trading, which only costs you a Bid/Ask spread on the instrument.
Another factor is that panic selling moves are usually overrun, and retracement moves never completely fade them out. This then requires proper risk/reward techniques and solid risk management plans. Price and time stop losses, as well as profit targets, should be utilised to avoid being caught in successive panic selling moves (especially when targeting retracement gains). When implementing short-selling strategies, the sell-side target is virtually unknown. Thus, trailing stops to lock in profits and protect capital should be utilised.
The Great Lockdown is set to dominate the theme of the markets throughout the year. Uncertainty may inspire investor fear, but the resulting volatility offers great short-term trading opportunities which investors can take full advantage of using proper risk management methods.