Don’t be Tricked by Short-term Market Moves
On the 20th of February 2020, you woke up and saw the markets have started crashing, triggered by the news about the novel coronavirus, Covid-19. All the stock prices kept going down every day onwards. You’re in front of the computer in the following days and weeks, keeping your hand in the buy button, excited to see the stocks, indices, commodities in the lowest levels in the last 3 years. You don’t know when to buy something because everything is crashing as it’ll never stop going down. You’re nervous but calming yourself down and appreciating you were not in position when everything has started crashing or immediately got out when you’ve suspected a market correction. You have waited, waited, waited, and all of a sudden the markets have turned around and was up 10% in a single day! This is it! Markets are returning! You must get in before everything comes back to its old and expensive prices. You get in front of the computer, the prices strongly keep going up. You immediately grab the mouse to click that buy button before you’re too late. The moment you’re about to click that button, STOP!
The situation that you are going through is not happening to you for the first time. This is called FOMO a.k.a. Fear-of-missing-out. If you decide to buy something under this fear, most of the time it’ll be a wrong decision, because you’ll be buying with your emotions and not with your mind. Markets go up, markets go down. You’re not missing anything and there will always be a rational opportunity waiting for you there.
Here, you may be asking yourself:
OK, but what is wrong with buying if the market is already going up?
Markets going up, doesn’t necessarily mean markets will keep going up. If you are not managing your risk well, maybe you’ll be up by 3% tomorrow but there is no guarantee here that you won’t be down 10% the other day. That’s why it’s quite crucial not to panic-buy or panic-sell in these times and stick with your strategy. One of the dangers awaits you in these kinds of situations is called dead-cat-bounce. As Investopedia explains:
A dead cat bounce is a temporary recovery of asset prices from a prolonged decline or a bear market that is followed by the continuation of the downtrend.(Investopedia, 2019)
If we visualize this concept a bit I believe it will be more explanatory:
I know it’s a bit mean to make an analogy on a dead cat but the principle mainly comes from the fact that
“even a dead cat would bounce if dropped high enough”.
As you may see it in the graph below on a real financial market, there may be upward price movements that are not strong enough to change the direction of the overall trend, so it will eventually keep going down.
And why do I think that the market turn right now may actually be a dead cat bounce?
It’s simply because nothing has changed fundamentally in the Western world to turn the markets around. Let me be very specific about the markets I’m referring to in this piece, which are U.S. and European markets since the whole world is not at the same phase of the crisis right now. In the west, everybody still has to stay at home, the number of confirmed cases and the number of people dying every day keep going up, most of the countries which have declared total lockdown didn’t end this practice yet. Most of the businesses are still closed and the U.S has just announced that 6.6 Million people sought unemployment benefits last week. (The Wall Street Journal, 2020)
If everything is still bad, why the markets have turned upwards, to begin with?
The markets have started going up because many countries have started printing money, open huge financial aid packages, China, South Korea, and some other Asian countries were somewhat able to take the pandemic under control with extreme measures. There has been a really small deceleration in the rate of confirmed cases and some rumors regarding the hope of a treatment or a vaccine started coming from all over the world. Therefore, the markets which kept constantly falling down for the last couple of weeks needed a small break and took every possible excuse to go up for a bit of relief. However, solely economical measures will not be sufficient by itself to turn it all to good old days.
Is there no chance of total recovery?
Of course, a major breakthrough in the fight against Covid-19 may trigger big move up in all the markets. Especially, the first quarter results of the companies will be a determining factor in the direction of the markets. Then we’ll really be able to see how this whole crisis impacted the economy in numbers. If the damage doesn’t turn out to be as bad as expected, any earnings slightly above the expectations may push the markets significantly up. However, don’t forget the fact that a recession was expected in the world economy, even before Covid-19 has hit the markets.
Don’t FOMO, stay vigilant, and most importantly, stay safe and healthy!
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Disclaimer: This article is provided for informational or educational purposes only and is not any form of individualized advice. Use this information at your own risk.
Dead Cat Bounce
A dead cat bounce is a temporary recovery of asset prices from a prolonged decline or a bear market that is followed by…