INSIGHTS

On March 16, 2020

AAM Viewpoints – Uncertainty Unleashes Fear

Whenever the stock market is suddenly confronted with a circumstance that presents uncertainty, investors can be expected to react swiftly and emotionally. During this market cycle, dating back to 2002, there have been numerous occasions when the sudden reactions to unforeseen headline stories have led to abrupt and unsettling selloffs. The COVID-19 virus outbreak represents one of the more chilling of these event-driven declines since its economic impact remains incalculable as nations globally take urgent, pre-emptive steps to corral its spread. It is not surprising, therefore, that the market is in the throes of one of its most volatile periods in decades. Until the impact of the virus can be reasonably quantified in terms of human and economic toll, the market can be expected to be highly reactive to breaking news stories pertaining to timely topics relating to the virus and its impact on the economy.

The correction has gained momentum amid heightened despair among investors over the epic global impact of coronavirus. Adding to these fears has been the advent of another unforeseen event – plunging oil prices amid the breakdown in OPEC (Organization of the Petroleum Exporting Countries) talks. On March 9, West Texas Intermediate (WTI) oil sustained its biggest daily decline (below $30) since 1991, representing a more than 50% drop from its 2019 highs. Although this news unfolded as the stock market was already well in correction territory, it nonetheless incited the biggest point decline (2,014 DJIA (Dow Jones Industrial Average) points) in stock market history. This surprise event may have ushered in heightened panic selling as depicted in the steep rally in the CBOE (Chicago Board Options Exchange) Volatility Index (VIX) to lofty levels in the 60s, five times beyond its one-year lows. This fear-stricken selling could prove a precursor to a market bottom and a sustainable rebound. And, the deeper the declines have been in this cycle, the more dramatic and powerful the subsequent springboard effects have been.

It is my assessment that stocks may be closing in on a major low amid selling capitulation since the general price patterns and concomitant fear levels line up with the technical schematics of other larger-than-20% declines since 2002. It is noteworthy that the market has now fallen into bear market territory. On December 24, 2018 the DJIA closed down 20% from its then-record highs before it embarked on a rally that continued into February of this year. In fact, the accumulation trends I have begun to observe suggest the onus may soon be tilting toward the bears as stocks reach longer-term (multi-year) support levels. Nascent positive net money flow trends suggest leadership will likely remain intact and that stocks should exhibit consistently better relative performances before the major indices, often a harbinger of a reliable turning point in the market.

CRN: 2020-0306-8093R