Global markets were rattled Friday morning after Trump revealed he contracted Covid-19 and the S&P 500 crashed 1.5% at the open. That said, stocks quickly found their footing and spent the rest of the day trading above those early lows, closing down a “less bad” 1%. Most significant for traders is the index continued respecting 3,320 support.
While this wasn’t a great way to end the week, the index still added 1.5% over the last five days in its first positive performance since late August. It is about time!
So far, Trump is only exhibiting minor symptoms and even in his age group, severe complications are highly unlikely (only 1 out of 20). But even if he develops a bad case, this is a human development, not an economic event and it will not affect the equities markets in a lasting way. There is a very clear chain of succession and strict protocols will prevent any significant uncertainty or disruption. Without a doubt, this would affect the country’s psyche and be another historic/tragic event for 2020, but it will not affect the economy in a meaningful and lasting way.
That said, the market’s initial reactions isn’t always based on logic and reason, especially in times of extreme uncertainty. This has been a volatile several weeks for stocks and it doesn’t look like that will change anytime soon. But as long as stocks remain above last week’s lows, the market is trading well enough to earn the benefit of doubt. Until we crash under the lows, approach every dip as if it is on the verge of bouncing. (Only after we crash under recent lows should we consider shorting.)
As I wrote Thursday:
Any breakout must cross 3,400 and any retreat will fall under 3,320. Those are our tripwires. Buy the breakout and short the breakdown. Start small, get in early, keep a nearby stop, and only add to what is working. If we stick to that plan, it doesn’t matter which way this goes next. Be prepared for a head-fake or two along the way but as long as we get in early and get out early, the risks are pretty low.
Despite Friday’s dramatic headlines, nothing changed. Short the breakdown and buy the rebound. Start small, get in early, keep a nearby stop, and only add to what is working. If the first trade doesn’t work, pull the plug and try again. When it works, take profits and do it again next time.
Expect this extreme volatility to stick around until after the election and that means every bit of up will be followed by a bit of down. Get in early and take profits quickly. As long as we trade confidently and proactively, this is a target-rich environment.
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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.