Special Market Update on Panic Selling By Van K. Tharp, Ph.D.

van tharp bkI’ve been a coach for traders and investors since 1982 – almost 40 years – but I don’t remember anything like the panic selling of the last few weeks. Even though the coronavirus might not be much different than the flu, it has the ability to greatly damage the worldwide economy, especially cruise ship, hotel, and airline companies. For example, I think there’s a warning that U.S. seniors should not fly in airplanes right now. To show you my level of concern, however, let me list my upcoming itinerary:

1) Kala and I are flying to South Africa on Monday, March 16th and are staying there until April 13th.

2) Not only that, but we are also taking a short cruise from April 1st through April 5th. I was able to track the ship we will be cruising on and it has been in South African waters for over a month. The last I heard, there were no known COVID-19 cases in South Africa.

Fear Is Causing Completely Irrational Behavior

The number of people worldwide infected with the coronavirus is now over 121,000 and more than 4,400 people have died from the virus. The worldwide data seems to indicate that the overall death rate is around 3.5% and it’s much higher for seniors and people with ill health. The fatality rates, however, might not be based upon actual facts about COVID-19 because most people are not being tested so we really have no idea of who might have had COVID-19 and recovered. You can get similar symptoms from pollen so a case of COVID-19 could be mild and you won’t even know you had contracted it.

South Korea has been doing the most testing and their death rate is about 0.65%— which is pretty close to flu levels. As a result, the markets will recover from this madness and my guess is sooner rather than later. I want to remind people that you only trade your beliefs about the markets – not the markets themselves. The beliefs most people have, when accompanied by massive fear, are not useful for trading and investing.

The coronavirus is having a tremendous impact on travel, global trade, and supply chains. It’s interesting that I was just offered a free cruise by Royal Caribbean in the Mediterranean and the Baltics. Here in North Carolina we’ve had only a handful of documented cases but you can’t find hand sanitizer in the stores nor toilet paper. To me, that is ridiculous. It’s like people are convinced they’ll get the disease.

Fear levels are very, very high. The volatility index (VIX) has only been as high as it is now twice before – during the financial crisis in 2008 and back in October 1987 when the Dow lost 22.7% in one day.

The U.S. economy was in good shape before the coronavirus hit and should be able to weather any brief slowdown. In addition, lower oil prices that caused such panic on March 9th are actually positive for consumers. Add in low interest rates (which will undoubtedly go lower again next week), and you have the strong likelihood that consumers will spend, especially with unemployment so low right now. Most people who want a job have one.

Market Reaction or Overreaction?

We’ve had a huge bull market. Thus, many traders have been in the market at huge leverage levels. Consequently, when there is any sort of panic selling, leveraged traders have to get out of their positions. It’s a little like the huge rally recently in Tesla, which I believe was mostly caused by short covering in a strong rally.

It’s been more than 11 years since we’ve seen a down day like Monday, March 9th in the market. Investors sold pretty much everything, as more than 95% of stocks in the market were down. In addition, BTC (which is supposed to be a totally non-correlated asset class) was down quite a bit also and gold stocks didn’t seem to provide much protection.

Here are a few of the things that are going on:

  • Oil prices dropped below $30 a barrel overnight on Sunday because Russia and Saudi Arabia have started a price war – which will be a boost to most of our economy. Saudi Arabia is aiming for a higher market share and hence lower prices. Prices dropped nearly 25% in a single day.
  • The Coronavirus spread seems to be slowing in China. Perhaps there will be a seasonal effect in that as temperatures warm the impact will go down.
  • The Coronavirus only seems to strongly impact the aged and those who are already sick. One Australian man died from Coronavirus but he also had Dengue Fever which is much deadlier than COVID-19. The virus seems to have little impact on healthy youth and adults.
  • Yields on 10-year US Treasury notes went as low as 0.319% as investors fled to the safety of bonds. That also means lower rates for borrowing which will increase liquidity and borrowing. I noticed that interest rate products in my retirement portfolio had done nothing to protect me from the March 9th downturn.
  • The Dow fell a record 2,000 points when trading opened Monday morning and the S&P 500 was poised for its largest single-day percentage drop since December 2008 in the depths of the global financial crisis. The Dow was down 19% at its Monday low — which is just 1% above the traditional definition of a bear market.
  • The graph below shows the S&P 500 weekly prices.

985 MU Chart1

  • Data suggests the global economy toppled into a recession this quarter. Figures from China over the weekend showed their exports fell 17.2% in January-February from a year earlier.
  • The fall in U.S. yields and Fed rate expectations pushed the dollar to its largest weekly loss in four years before it recovered some ground on Tuesday.
Companies will start releasing their 1st quarter earning so we’ll be able to see the real economic impact of the Coronavirus.
Here is our world market model view of the European and Asian Markets. Europe is all red and brown (only two are brown). Asia is red to yellow. But notice that China, the country most impacted by Coronavirus is one of the few yellow countries.
985 MU Chart2
Commodities are the same story. Gold is bullish, Global Water is neutral, but everything is red or brown. Currencies show a bit different picture because most are green with the noticeable bear being the US Dollar. The most talked about sectors don’t show any relief with everything being bearish except BTC (and remember we were stopped out of our latest position).
985 MU Chart3
Interest rate products are the only bull story around with lots of big money fleeing to this sector.
And lastly, notice that out of 592 ETFs that we follow in the world market model, 434 or 73.3% are now bearish. Only 37 very bullish and they are practically all debt instruments.
985 MU Chart4 5 Combo
Newsletter Comments

I looked at a couple of newsletter press releases yesterday.

Steve Sjuggerud of True Wealth wrote on March 6th:

So you may be surprised to hear this… but I am extremely excited to buy. No, I haven’t bought yet. But I will personally be a big buyer very soon – when we start to see the beginning of a new uptrend.

Motley Fool (March 9th) says:

Historical data indicates that market declines of 10% happen about once every 11 months on average (and 20% every four or five years). So we didn’t know when the market would decline. But we knew that a downturn of 10% or more was inevitable at some point. And while it’s always painful to watch stocks decline, we built our investing strategy to handle downturns — and to prime us for prosperity in the decades to come.

My Advice

1) The S&P 500 moved into a Bear Volatile market type three days ago according to our Market SQN® score. Bear and Volatile strategies could come into play now. We haven’t presented our Bear Market workshop for several years and we have been planning to release an elearning version of the course. That release is still probably 3-4 months away but with the ability to help traders understand the bear market type, we have just released a “rough cut” version of the course as video on demand. You can get more information HERE.

2) Our BTC trading system signaled an exit on Sunday as the stop was hit. This was only the 3rd loss the system has had, the biggest loss at —14%, and the shortest duration of any trade for the system. It seems that BTC traders also went into panic mode on Monday. The trade history is shown below –


985 MU Chart6

Right now, we need BTC above $10,300 to reenter.
Something else has been going on in cryptos – a multimillion dollar Chinese Ponzi scheme promising people huge returns if they deposited BTC and ETH in Ponzi account. They managed to con people out of an estimated 180,000 BTC and about 6.4M ETH before the government closed them down. Now they are dumping their hoard. The big trading desks know they have millions of cryptos to be unloaded so they’ve been lowering their bids. The scammers paid nothing for it so its still a huge profit for them.  It’s now estimated that the scammers have about 20,000 BTC and 70,000 ETH remaining. When those are gone, expect a massive rally, but not until that time.   
What I am Doing

1) I haven’t touched anything in my retirement plan. It was down more than 10% on Monday – one of the biggest single day declines ever, however, I’m sticking with my stops. One of my employees is in an age defined plan with American Funds.  She’s old enough that her plan should be conservative but her account was also down 10% on March 9th.

2) I will probably go to 20% cash before I leave on my trip – as I often do before travelling.

3) I have kept a position in Gold. When we get negative interest rates (and for a while on Monday every debt instrument was yielding less than 1% for the 1st time in history), the Fed has to print massive amounts of money. It may take a while but this will lead to a tremendous upswing in gold. In the wake of the global financial crisis, gold went from $682 in 2008 to a $1,921 in 2011. It’s currently between $1,600 and $1,700.

4) I haven’t touched my long-term position in GBTC and I don’t plan to. I still expect 2020 to be a huge bull market for BTC.

What Should You Do?
You only trade your beliefs about the market, but are your beliefs useful? Do you even have a real trading system? One for this market type? If you have a proven system and it can function in this market type, then follow your rules. Let me emphasize that fear-based beliefs are not useful for traders/investors.
If you don’t know anything about how to operate in bear markets, then watch our video on demand course on bear markets. Learn more HERE.
I’ve also decided that we picked a great time for our Trading Genius II Trading Contest. Two weeks ago I knew exactly what I was going to do with my five trades. Now the only thing I know is that I will probably be 100% cash when the competition starts. The contest gives you a great opportunity to really learn about your beliefs, how you trade, and how your performance compares with Super Traders – many of whom are entering the competition. Because of some technical trouble with the webinar last Friday during which I offered the special price for Trading Genius II and the ability to win contest prizes, we have extended the deadline for signing up for a few more days. For more information watch my webinar from last week. WATCH WEBINAR  (We are aware of intermittent sound quality issues. We apologize for this but the information is audible and this is the best source of information about this contest).
Also you can learn about the Trading Genius II course  HERE.

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