The S&P 500 cratered 3% this morning after Coronavirus anxiety hit full-panic-mode over the weekend. This health epidemic continues to spread beyond Chinese borders. While the number of reported cases outside of China is still quite small, the fact western governments are unable to contain it is leading to some doomsday predictions.
Whether the market is right or wrong about the Coronavirus, it doesn’t matter, we trade the market we are given. As it stands, this 3% kneejerk reaction could go either way. We bounce sharply off the lows and never look back as confident owners continue ignoring every bearish headline. Or this massive strawbale shatters the camel’s back and turns formerly confident owners into a herd of panicked sellers.
Which is it? It is a little premature to say conclusively, but the market’s midday rebound gives us some hope. While there is no telling how far an emotional selloff can go, the fact stocks mostly traded around opening levels is a good initial indication. It signals most owners are staying calm and not rushing for the exits. The midday dip under the opening lows could have triggered another cascade of defensive selling, but within two hours, supply dried up and prices bounce back. It is definitely a tad early to be celebrating, but this is a good first step. Anyone with a little cash can buy the bounce and put a stop under the midday lows. As always, start small and only add to a position that is working. If prices go the other way and violate the lows, a short could position be called for. Times like this, we simply follow the market’s lead.
As for my personal trading, this morning’s tumble caught me off guard. Last Friday I liked the way the market went into the weekend and I put on a small position. I wrote about the reasoning here. The Cliff Note’s version is three weeks ago I had a great trade that started with buying a Coronavirus Friday slump. Two weeks later, the S&P 500 was nearly 200-points higher and I locked in some really nice profits. Last Friday’s setup was similar and presented an attractive opportunity. But as we saw today, there are no guarantees in the market. Luckily, this isn’t my first rodeo and I was prepared for this outcome, both strategically and emotionally.
First, I bought wisely last Friday. I entered nearly the daily lows and even more importantly, I started with a small position. I always start small and only add more money after the trade is working. That way, when I’m wrong, it doesn’t hurt and I’m still in a great position to jump on the next trade. Between experience and modest position sizes, waking up to a morning like this isn’t a big deal. In fact, I’m excited by today’s price action because this volatility screams profit opportunity.
This is definitely a buyable dip, the only question is how low we go first. While I took it on the chin this morning, I actually welcome this dip because there is far more profit opportunity following a 5% plunge than there would have been riding Friday’s 1% rebound.
We don’t get to chose the opportunities the market gives us and we need to be ready for everything. This morning’s tumble got me out of my small position, but as soon as I bailed out, I started looking for the next opportunity to get back in. An aggressive approach is buying the midday bounce with a stop under the lows. Buying this tumble means I can make even more money than if I were originally right about Friday. If I’m wrong, I get squeezed out and try again, this time buying even more attractive discounts.
The key to surviving this game is always trading from a position of strength. We don’t need to be right all the time, but we do need to know how to respond confidently to every situation the market presents us. Many times that response is even more profitable than if we had been right all along.
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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM
Jani Ziedins (pronounced Ya-nee) is a full-time investor and financial analyst that has successfully traded stocks and options for nearly three decades. He has an undergraduate engineering degree from the Colorado School of Mines and two graduate business degrees from the University of Colorado Denver. His prior professional experience includes engineering at Fortune 500 companies, small business consulting, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two children.