Epic Selling Is Not Over According to These Charts

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The market fell more than 15% in a few days. It feels scary – just when everyone felt that the coast was clear, selling came from nowhere. I did warn that a pullback was coming, but of course, few could have predicted global coronavirus pandemic fear trashing markets.

All stocks were slammed. The market’s fear is that the virus will affect businesses. If entire towns and companies stop business, people will stay home fearing infection. They will stop spending money. With Japan and Germany among other countries already in a recession, the fear is that the virus will push the United States into a recession too. Sudden fear and panic selling is rocking world markets.

Consider this:

According to this report, there are 87,701 confirmed cases of coronavirus, with 2,995 confirmed deaths, 42,687 that have recovered, and 42,019 cases that are still active. Of these cases, 91% are in China and 4% are in South Korea. Of the total deaths, 96% occurred in China.

Sickness and death are very serious. I don’t make light of it. It’s terrible and tragic. But I’m a numbers guy. Current reports mean that only 0.001% of the world’s population has contracted coronavirus. That means, logically, that 99.999% of the world does not have it (yet). And of the 0.000039% of the world that has died from the coronavirus, many were elderly with a preexisting condition.

As of Feb. 22, the current flu season saw at least 32 million cases of flu in the United States, 310,000 hospitalizations, and 18,000 flu deaths, according to the Centers for Disease Control. Each day, 102 Americans on average die from car wrecks in a country with a population of 350 million. That’s 36,500 people per year just in the United States, a country with less than 5% of the global population.

Look, I don’t want coronavirus. I don’t want my wife, kids, family, friends, or even non-friends to get it. It sucks – plain and simple. So, I wash my hands often and cover my mouth when I sneeze or cough – both things my mom taught me to do as early as I can remember.

Buying surgical masks does more to protect coronavirus from getting out of the wearer as opposed to corona getting into the wearer. And paying surge prices for a mask to protect poorly against a virus that I am statistically far less likely to die from than a car crash seems like an overreaction. So does throwing out the baby with the bathwater when it comes to stocks.

Don’t forget – stocks aren’t just numbers on screens. They are shares of businesses providing services and products to individuals like us. We still need to feed and clothe ourselves. That’ll never stop. Neither will business. So, what makes a global fast food restaurant’s stock (business) worth 20% less than last week? The answer is fear. And that’s what’s happening.

How do sell-offs happen these days?

Stocks are getting punished for a few reasons:

  • Algorithms and computers run today’s market. To simplify: computers seek bad news, then sell stocks. If sells get gobbled up, machines know not to short, so they cover, reverse, and buy. If stocks go lower when they sell, they sell more. This happens many times per second, and with everyone too scared to buy, markets plummet. Humans pause when afraid. We stop buying stocks. We wait and get paralyzed. With markets at highs, news stories emerge: a new terrifying virus from China threatens global health and economies. The media overdramatize and scare people into watching. Don’t forget – news makes money off advertising. If people don’t watch, ads don’t get seen. Products don’t sell. Sadly, fear is the biggest seller of all, and the media love a good panic. They fan flames and whip everyone into a frenzy. It’s good business.
  • As stocks rise, investors put in protective trailing stops. I don’t love those. I’ve been stopped only to watch stocks race higher. But investors don’t want to lose. When markets go down sharply, those stop orders get triggered, which causes even more selling.
  • Hedge funds have risk managers. They tell traders to lighten long exposure. Hedge funds often crowd into the same trades. When everyone rushes to exit simultaneously, things get ugly fast. More selling happens.
  • Then everyday investors get nervous. People like you and me call our broker. “I can’t lose another 5% – sell and I’’l revisit when this craziness calms down.” Mom and pop are usually exchange-traded fund (ETF) investors. Brokers then sell the ETFs, which are mostly baskets of stocks. When big banks like JPMorgan Chase & Co. (JPM) make markets for your brokers, they bid on the ETF. The broker sells it to the bank, which has to hedge by selling stocks. They don’t want long-risk in a diving market. Their job is to profit daily, not to take a long view. That causes more selling.
  • This cascades down until the eventual washout happens. There’s no one left to sell. That’s usually when the sharp V recovery begins.

This is how stock sell-offs happened over the past 10 or so years. You can see epic ETF selling here:


What am I doing?

I am not selling; I have a long-term view. I don’t believe that a restaurant selling burritos is worth 20% less than last week. So, I buy a little. And when it goes lower, I buy a little more. But I believe in their business. I see the lines out the door. I know that they have a hit on their hands. And if there’s a temporary interruption because of irrational fear, it won’t last forever. They won’t go bust. I get a deal. 

I’ve been buying stocks slowly on the way down, picking my spots and putting long-term money to work. This is money for my retirement, for my kids, and for my family.

Here’s the good news. When fear peaks, people from years ago contact me. Old friends I haven’t heard from in ages text. They send notes like:

  • “Still bullish?”
  • “Are you buying here?” 
  • “How low can we go?”

That’s often close to the bottom, because that’s when people are reaching their breaking points. They see their 401(k) dropping and can’t stand the pain. It means we are close.

Why is it bullish?

Here’s why stocks are the place to be. The 10-year Treasury note yield is 1.127%. That’s the lowest on record since 1962. Panicked investors buy bonds, pushing down yields. They would rather earn that low rate of return for the safety of the U.S. government holding their money.

The S&P 500 dividend yield is 1.97%, nearly twice the 10-year yield. Dividends are taxed at 23.8% vs. bonds at 40.8%. This means that stocks give you 125% more than bonds. That’s incredibly bullish. And when the 30-year yield is less than stocks, that’s crazy bullish. Today the 30-year Treasury yields 1.671%.


When do I get involved?

“So, when do I buy?” Great question. Going back to 1990, Mapsignals data showed 27 times that selling on a particular day was more than eight times the 50-day average. Three were last week! That’s monster selling. In short, it found that average one-, three-, six-, nine-, and twelve-month returns were significantly higher for stocks. One month later, the S&P 500 was higher 19 of 27 times.

As for when to buy, the average trough in the market occurred 21 calendar days later: three weeks. So, according to this data, three weeks from Friday, we can expect the market to trough out. Here are the results:


Here’s a chart showing those days on a chart of the S&P 500’s performance:



Great companies will continue greatness. Even after the 1920s crash, the tech bubble, 9/11, and the financial crisis, great companies emerged and made some smart people wealthy.

These are the types of companies I am buying – great businesses with moats, strong sales and earnings growth (even if temporarily disrupted by pandemic fear), profitability, and big-money ownership. Long-termers pounce when these stocks go on sale. The problem is that fear paralyzes people, and they fail to act. Fear may propel markets lower in the near term, but buying great companies on sale is a gift.

The Bottom Line

We (Mapsignals) continue to be bullish on U.S. equities in the long term, and we see any pullback as a buying opportunity. Weak markets can offer sales on stocks if an investor is patient. 

Disclosure: At the time of publication, the author holds no positions in any stocks mentioned.

Source: Investopedia

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