With the Covid-19 outbreak declared as a Public Health Emergency of international concern on January 30th, 2020, investors around the world have been following the markets daily, watching stocks bounce as volatility continues. Many newer equity investors have never seen a bear market before... For some, it’s tempting to buy the dips. For others this is a painful time as they watch portfolio values decline in the middle of a market frenzy.
The CBOE volatility index, or "Fear Index" which represents traders' expectations of 30-day forward-looking volatility based on the price of S&P 500 index put options posted a record high close on Monday at the 82.69 level. The average level for the VIX is 18, going back to 1993 when the VIX index was established. It is very clear that panic has entered global markets.
On a positive note, The VIX index is mean reverting, meaning fear will eventually dissipate and markets will normalize. Monday marked the 3rd worst close for the S&P 500 in history. The only days with larger S&P 500 declines were Oct 28 of 1929 and Oct 19th of 1987. Monday's market move was also the 3rd consecutive 9% move up or down since 1929. Also interesting to note, the number of stocks in the S&P 500 index trading above their 200-day moving average fell below 4% which has not been seen since the 2008 financial crisis which signaled a buying opportunity.
In times of market panic and extreme volatility, it's important to focus on sentiment indicators such as the ones I mentioned above as technical levels are hard to make any sense of when panic floods the markets. Is the selling over? No one knows. If you are looking to put some money to work, start with small positions and add to winners. More importantly, cut your losses fast.
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