Markets are selling off because of the news that the coronavirus is spreading.
When does it end? How long can the market sell off?
These are relevant questions. It is necessary to understand an important thing about this sell off:
There are two VITAL pieces to a market correction
- A catalyst: something to get a sell off moving
- CONDITIONS: the market needs to have valuations that are out of whack enough that the a catalyst can get some follow through as traders say:
“I am taking my money and going home!”
The Virus is a catalyst.
The market CONDITIONS for today’s price action (and likely in the coming days) is the valuation and performance of the top companies in the S&P and how top heavy the S&P 500 currently is.
Heading into the price action Thursday, take a look at the charts of the worlds LARGEST COMPANY:
The stock went STRAIGHT UP From the August lows. The price action was akin to a biotech or emerging tech stock, not a stock going from $800 billion to $1.4 TRILLION in value.
The market began selling off because of the catalyst that is coronavirus. It could have an ugly few days because of valuations and pricing (the conditions).
There has been a lot of money made in the last year, and the smart money is going to want to take its ball and go home while the S&P 500 is over the 200 DMA.
The 200 Day Moving Average is still 200 points away, about 7% below current levels. I think we could totally set up to be there in short order as investors try to lock in YEARS of gains.
Another major issue with the S&P 500 here is how top heavy it is. The top 5 names make up almost 20% of the index. Those top 5 companies also happen to be AAPL, MSFT, GOOGL, AMZN, and Facebook. Names vulnerable to a market pullback.
So the big question is: IS THIS REAL? My answer is yes. Here is my confirmation: the VIX. The VIX curve is completely backward right now.
When we see Cash above the March future, and March above April, and April above May, that is a sure sign the market is worried that we could have extended volatility.
The VIX at 22 means the market is looking for 1.5%-2% a day for the next 30 days. That is serious volatility. This could mean that we have markets dropping, and powerful rallies as well.
Which brings us to the 1,000,000 question:
Does this mean we are heading for the BIG ONE??? The answer is I do not know. No one knows.
What I will say is that the conditions are STILL in place for a really big sell off.
The coronavirus was a ‘catalyst’ to this market pull back. If we get one more catalyst, we are going to have something ugly on our hands, perhaps a real correction to the tune of 20%.
Markets tank because of conditions, but tanking STARTS because of catalysts. We are a powder keg of selling conditions, all we need is a match..
Your Only Option
PS Stay tuned for a video on VIX later this week
PPS My next post will be about understanding information