Some of you might be as perplexed as I am as to why the markets didn’t fall farther, and why we saw that recent huge rally. I was holding some puts in anticipation of a bigger drop, and they lost about 90% of their value over 2 weeks (I’ve since cut my losses).
Let’s collect and list some of the reasons why markets aren’t continuing to fall. I there’s something missing, comment and I’ll add it to the list. Here’s the list:
- There’s an expectation of a speedy recovery
- We only have 2 months to go until the shutdown ends (according to this model which projects April 15 as the peak), assuming the shutdown remaining in place through May
- Bailout bill is large enough to keep businesses afloat for the next month, maybe two
- The recently unemployed are mostly service industry people who will be hired back quickly once businesses reopen
- Oil price war may be over soon
- Tons and tons of cash has been sitting on the sidelines waiting for a good time to buy, now it’s flooding into stocks
- The Fed’s QE program means it’s a good time for large funds to rotate out of bonds into stocks
- ETFs are the preferred investment vehicle for most people through their 401k or IRAs, and people are trying to “buy the dip” or just buying on autopilot
- Automatic rebalancing from balanced funds and roboadvisors
- Liquidity lifeline for banks and hedge funds and relaxed reserve requirements means fewer margin calls, less selling pressure
- Big funds, HFTs, and maybe even some MMs are waiting on the sidelines for things to settle down (which might be why volume dropped a bit recently after a huge surge)
- There isn’t enough economic data yet
- Earnings reports haven’t come out yet
- Market already dropped 37% from high to low
- Global liquidity crisis means all central banks are printing money which buoys the US dollar, allowing the Fed to print more money with limited inflation
My thoughts: I expected markets to drop another 30-40% a couple weeks ago, but instead we saw a big 20% jump. I’m still skeptical of the current situation, but if the virus growth continues to slow we might see that V recovery after all. I’m holding some bonds and a few call LEAPs for QQQ (tech will do well no matter how things go, IMO) and USO, as well as October VIX puts. I’m considering buying some RUT puts 3-6 months out to hedge against another big drop.
Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence.