Is It Time To Go Defensive?

Since the great Financial Crisis in 2008, the U.S. stock market has seen 27 pullbacks and corrections of at least 5% or greater.

Is this time different? Not in terms of amplitude, but the speed in which this correction has unfolded is unprecedented.

The only other time the major benchmark indices fell 10% or more in seven trading days from its all-time high was December 1928.

Is there something else afoot to this swift decline?  Some postulate that it is concerns over the current U.S. presidential race, wrapped in a potential global pandemic.

The coronavirus, as of this writing, has not yet become a pandemic. From a U.S. perspective, it is now “just” an epidemic since it has only infected our neighbors.  If infections begin rapid transmission throughout the U.S., we will start to call it a pandemic.  This is the uncertainty infecting the markets and investors’ psyches.

What We Do Know About the Markets

• This has been a swift “mini-crash” off of all-time highs just seen last week.
• Indicators that attempt to measure FEAR have hit extremes – the VIX Index skyrocketed from 15 last week to near 50 today, and the Fear & Greed Index dropped from near 70 (bullish) last week to under 10 (bearish) today.  Both indicate some sort of “wash out” in the short-term.
• The markets violated several support levels and moving averages during the market tumult this past week – technical damage that will need to be repaired over time.
• According to Lowry’s Research, two 90%-Down Days and one 80%-Down Day was registered this week … a sign of capitulation.
• Fear-induced selling is NOT an investment strategy

The Unknown

Financial markets disdain uncertainty and there is such a widespread vacuum of accurate information at this point that is being filled by rumors, fear and panic.  We do not know how severe this Coronavirus crisis will get nor how long until it is contained.  We also do not know how severely it will impact global economies, or even if this impact will cause a recession.

In Conclusion

Our response has been that many of our tactical models have been raising cash –or- reducing leverage –or- waiting for further declines that trigger defensive signals.

If next week continues with steeper declines, many of our tactical strategies will be mostly defensive. The risk now is that further declines could move us into bear market territory and overblown fear could risk an all-out market crash.

If there is a bounce-back next week, it will take some time to repair the technical damage before we begin to resume new all-time highs.

Remember that our job here at Global View is to manage portfolio risk based upon data analytics, not headlines. Rest assured, we are monitoring markets closely to protect our clients as this market uncertainty plays out.