The answer seems easy: the coronavirus! But if I'm telling you that it is not much to do with the virus but most of us who are really bringing down the market, what is your reaction? I'm sure I will be cursed as an insane guy who has no clue what I'm talking about. But I'm very sane and know for sure this is very little, if not nothing, to do with the coronavirus outbreak. Be clear, I'm talking about the real underlying cause for the selloff, not superficial temporal relationship. As I have warned for many weeks that something big to the downside was coming and coronavirus is just giving an easy excuse to trigger the selloff. If there were no coronavirus outbreak this time, something else would have filled in to trigger this bloodbath, maybe a "flatvirus" or other sort of crisis somewhere in the world. Do we lack of crisis in the world right now?😵
The real causality for this harsh selloff is rooted in the greed of the market composed of all the people involved in buying and selling, including you and me of course. When most of us become FOMOs that make the euphoria to the absurd level, a crash will come for sure sooner or later. You see, we were in a situation where the S&P 500 hadn't seen a 2% sell-off in 124 days – the eighth-longest streak in 30 years. The index was up more than 30% in 2019 and had conditioned investors to believe that every smaller sell-off presented a tremendous buying opportunity. So people in general were blindly chasing highs or buying each tiny dip. This was a market where stocks like Tesla (TSLA) and Virgin Galactic (SPCE) were doubling – and then doubling again – in a matter of weeks. I saw a chat talking from someone a few weeks ago who basically said he did not see any potential issues that could push down the market meaningfully at the moment. I could only shake my head more when I saw this. I saw a vivid analogy that can perfectly describe what is happening now (analogy from my friend):
Think of it like this... You're on a raft heading down a river full of rapids. In the beginning, only a few investors are on the raft, and you can easily navigate the rapids. As more folks climb onto the raft (i.e., more investors pile into the stock), it becomes less stable. Suddenly, even hitting a small series of rapids may send a bunch of folks flying off the raft (i.e., the stock falling).
Actually in this kind of extreme euphoric mood, the market can even turn upside down without apparent reasons. We saw this happened in Aug 2011 in a very similar scale. The market was doing great in the months before Aug 2011 as the market rarely had a 2% down day in over a year back then. Sounds familiar?! Then all the sudden, S&P started to drop by 3%, 4.8%, and 6.7% within a week, which brought the five-day decline in the S&P 500 to 13%... It was worse than the 1987 market crash and worse than all but three periods right after Lehman went bankrupt. During this period, there was little economic news of any real consequence. But of course, the pundits would always identify some culprits to blame, e.g. the U.S. credit rating downgraded from "AAA" to "AA+", or concerns about European sovereign credits or weak industrial production, to name a few.
If you are one of them who have the habit to chase highs, then just remember, there is no such things as risk free investing or trading. You don't need to know what is the exact risk that can derail a roaring market but you can reasonably be sure that the risk is increasingly higher when the sentiment becomes extreme either way. Please engrave this statement into your brain: low volatility is always followed by high volatility! Of course, same is true vice versa: high volatility is always followed by low volatility!!
So right now, we are seeing a widespread depression sentiment and I'm pretty sure we are very close to the bottom than to the top at the moment. Tomorrow, I will show you a road map how the bottoming process will likely evolve in the next few weeks.
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