Nothing Else Matters

You can't turn on the TV without seeing headlines of the biggest down day ever or fear of the coronavirus.  Right now emotions and headlines are driving the markets.  During panics, nothing else matters besides psychology.  You can throw out PE ratios, valuations, fundamentals, sentiment, etc.  Once emotions take hold, markets tend to act irrationally and that can last longer than expected.  The fact that the S&P has corrected roughly 15% off recent highs shouldn't shock anyone.  The average intrayear drawdown is 14%.  What has been so surprising is the speed of this move.  In fact, this is the fastest stock market correction ever.  Below are some data on the current pullback. 

A tweet from Michael Harris shows how rare this move is.

Charlie Bilello says that 7% of stocks in the S&P 500 closed above their 50-day moving avg, lower than 98% of historical data back to Dec '01. Other periods in extreme oversold zone (bottom 2% of readings)... July-Aug '02 Aug '07 Jan '08 Oct-Dec '08 March '09 May-Jul '10 Aug '11 Aug-Sep '15 Dec 2018-Jan '19

This sell off has seen sentiment go from opposite extremes in quite a short period.

One bit of conflicting data is the usual flight to quality investments are getting hammered today.  Gold, silver, utilities, and cryptocurrencies are all down.  Meanwhile, semi's and oil and gas names are flat to positive.  The only real place to hide are good old US treasuries.  They have been the best hedge against equity weakness.  Maybe just maybe, we are starting to see some positive divergence in some sectors and the market is looking to find a short term bottom.   

The good news is the returns going forward after sharp mean reversion is usually pretty bullish.

Nautilus Research shows the forward returns after an excessive move in volatility.

Another good study from Charlie Bilello shows the S&P 500 forward returns following bottom 2% of historical readings.

No one has any clear answers on how much further the coronovirus will spread.  I can say with certainty that news will make matters worse as the media loves selling fear.  The fact that the economic impact is so unknown is the scary part considering the speed of transmission of this virus.  Yet, data below from Jeroen Blokland is a positive data set in an otherwise gloomy news cycle.  The number of new recovered cases (green) has been bigger than the number of new confirmed cases (red), and the gap between the two is increasing!

For now the momentum is clearly in the hands of the sellers.  Extremes overshoot on both sides and this time will be no different.  I or anyone else has no clue when this will end.  It will end when it stops going down and I have the faintest idea of when that is.  But I do know this will pass and the best thing I can do is stay disciplined and don't panic.  Take a deep breadth and relax and let the psychology play out as nothing else matters.