The Coronavirus Trader’s Handbook

“Everybody has a plan until they get punched in the mouth.”

– Mike Tyson

We saw an 11-year bull market end on Wednesday, March 11.

Then we saw the biggest percentage decline in the S&P 500 since 1987’s Black Monday on Thursday, March 12.

When panic hits the markets on the levels we’ve seen this March, only the quickest of trading strategies will work. 

Some who were leaning short and bearish also capitalized, but only after underperforming for many years.

The last couple of weeks in Global Markets have been nerve-wracking, to say the least, and even the most perma bears in the world cannot say that they predicted the Coronavirus to the trigger that would bring the world to its knees.

This though is where the elite shine and hedge funds that have hedges with short positions, etc, can mitigate losses and even make money.

We’ve seen one of the largest Hedge Funds in the world down 20% (Bridgewater) in their “all weather” portfolio…

So the name of the game right now stays as close to even as possible and then when things rebound and the peak fears are in the rearview window. It will all be captured profit. 

 Crisis News Events have a pattern

  1. A developing news story that no one feels the need to price into the market.
  2. Catalyst story causes panic pricing – the market tends to overprice the news.
  3. The market realizes it’s been overdone and retraces to more realistic pricing.

Right now we’re stuck in the longest phase 2 I’ve ever witnessed, and it’s due to the unprecedented psychological horror of Coronavirus. But at some point, we’ll know a lot more about the virus and have hopefully remedies and vaccines showing promise, and the panic will subside. 

But first let’s look back how this whole story started:

  • On December 31 last year, China alerted WHO to several cases of unusual pneumonia in Wuhan, a port city of 11 million people in the central Hubei province. The virus was unknown.
  • Fast forward to January 22 the death toll in China jumped to 17 with more than 550 infections.
  • Many European airports stepped up checks on flights from Wuhan. And then they canceled Chinese New Year which started for a week on Jan 25th.
  • Then the Shanghai stock market opened after being closed during the New Year week. All the while the news was getting worse, more cases, more death.

The Shanghai gapped down 10% Upon opening on Feb 2.

Less than 5 days later. The S&P was at all-time highs

This chart shows the S&P 500 Gold line and Shanghai Comp White from Jan 9 2020-Feb 15 2020

Enter Phase 2

Just this week Monday we had the third-worst point sell-off in Dow History.

And we lost more than 1.75 Trillion dollars worth of stock value worldwide on Monday, February 24th alone.

Why? What changed?

We got the catalyst that triggers and shifts everyone and everything to phase 2.

For weeks I’ve been saying that once we saw people starting to die from the virus outside of China, things would take a turn for the worse.

And then it happened….The Coronavirus spread and started to kill people outside of China. Korea and Italy to be exact.

And then the markets in the US came undone.

In less than a month, we went from all-time highs on S&P 500 to a Bear market, something that’s NEVER happened in the history of the stock market!

Source: Bloomberg

Chapter 2 – Adapting to High Volatility

An entire generation of traders has only seen a bull market. They’re used to the daily range for the S&P 500 to be under 1%. Such small ranges and slow action make it easy to put on trades. You can be complacent, not overly tactical, and have zero understanding of intraday moves to invest or put on swing trading positions.

But when Vol explodes here’s a few rules of thumb to help:

  1. Don’t be a Hero. Calling the bottom is an alluring pursuit but it’s a fool’s game, once the bottom is. 
  2. Be hedged with shorts or puts. Defensive stocks, Gold, Bitcoin- none are real hedges in moments of liquidation. The only way to protect your performance is to be as market-neutral as possible.
  3. Cut your size on new positions. This is a function of both uncertainties, the difficulty in timing into positions, and of course the enormous ranges that stocks are moving. At 50 VOL stocks should be expected to move 3.5% a day up or down- for me that’s a minimum with the stocks in the center of the storm doing double that.
  4. It’s OK to miss moves. There’s so much happening you can beat yourself up by missing trades, this is a normal psychological response. You’ll never catch all the moves focus on your best cases, in the instruments you’ve watched and know the best.
  5. Trade Index ETF’s or Futures. They’re the most liquid, the least susceptible to individual news bomb risks, and frankly, the moves are so massive you’ll have all the action you could need. In times of suppressed VOL like we were in pre-Covid-19, you need to be creative in single stock cases. Not now.

Where Are We Now?

This is a scenario where there is no textbook. As the broader societies shut down across the world with no visible end, the existential crisis continues.

And of course, the market hates uncertainty so we could stay in phase 2 for a bit. The figure below shows the returns of some major asset classes since Coronavirus through March 13, 2020.

A couple of standouts are how big the U.S treasury move has been relative to other sovereign debt.

Oil, of course, taking a 50% haircut is the real disaster zone.

And the worst stocks in the world are in Europe right now.

This shows how quickly we’ve gone into the Bear market zone going back to the Great Depression. The velocity of this sell-off doesn’t just feel extreme, it’s historic!

The last 2 deep bear markets…

Stocks lose 36% on average in a bear market 

If history holds up there’s downside a good rule of thumb is that the real bottom picking vultures will be out on the 50% haircut. But remember every case is different.

The post Coronavirus world will not look exactly like the world before. Some sectors and stocks will be nationalized. The risk is to bottom pick stocks that will be wiped out, so the first thing you need to think about is the viability of the companies you’re invested in.

Another thing to note is that vicious bear market rallies will feel like a bottom only to have more legs down.  

Bear markets tend to be short-lived. The average length of a bear market is 299 days or about 10 months, that being said given how fast we entered one there could be an extended period with this type of selling. 

You need to make long term purchases first with the idea that you will hold them longer than the next year. Which means you won’t need that money in the next year…

Remember the markets will rebound before the economy and your local reality. So don’t wait for those things to align. What we need is positive price action on more bad news! We need the market to get bought in situations you’d think they’d crash. We’ve seen the market crash on situations that we thought they should rally like rate cuts. Price Action is everything right now.

Survival is the name of the game for society in real medical terms and the same holds true in the market.

This too shall pass and we’ll be better for it on the other side.