How Much Will Global Markets Suffer from Corona Crash?

Mar 20, 2020

Apurva Sheth, Editor,Profit Hunter Pro

Do you want to know when will the carnage end?

Are you fed up of seeing the markets crash daily?

How long before your portfolio stops bleeding daily?

If the answer to all the above questions is yes then read on....

Coronavirus which originated in Wuhan city of China is spreading across the globe. The death toll outside China is increasing. Hundreds of people are dead in Italy and the virus is showing no signs of stopping.

It seems that world markets are factoring in an end of the world scenario the way they are falling for last few days.

I don't know how the virus will impact our lives or the economy but these are the possibilities I can foresee at two extremes.

  1. Everything becomes normal in a few months and its business as usual.
  2. The virus affects most of the world's population and we face a high chance of an apocalypse.

In the first case, the economy suffers a major setback but we are back on our feet. The world will still need products and services. Some businesses will die while others flourish in the new environment.

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In the second case, the economy goes for a toss. The world fights for survival daily. All your wealth is useless as the only thing that matters is putting food on the table for your family. The only thing you'll need is canned food and a gun.

I know such binary approach isn't the right way to think. The answer to our current problems probably lies somewhere in the middle of these two possibilities.

But it seems that markets across the world are behaving as if the end of the world is near.

I am an optimist and would like to go with the first option which means business would return to normalcy sooner or later.

So, you must buy stocks and invest for your future.

Even if the world is about to come to an end all your wealth will be worthless. So just buy enough food and invest the rest. So, in both the cases you must invest for your future.

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Now global markets are in panic mode and bottom is nowhere in sight. For most of us 2008 is the only precedent which was like the current fall.

Today, I am sharing a unique way to measure how we are currently placed with respect to the fall in 2008.

In the world of trading, perception often swings from flawless to hopeless. The 200-day simple moving average (SMA) is a tool to gauge the general perception of markets. If prices are trading above 200 day SMA then the market is bullish. If they are trading below it then market is bearish.

The relationship between 200 SMA and price is like a dog tied from a leash. The dog can go only so far as the length of the leash. Same with price. It can stretch far above or below the 200 SMA but it eventually moves closer to the average.

How Far Global Markets Can Stretch

Indices Last Low Price 200 Day Simple Moving Average (SMA) % difference Between Last Low Price and 200 SMA Farthest % Price has ever dropped below 200 SMA [4]
[1] [2] [3]
Dow Jones 18,917 27,122 -30.25 -34.76
Frankfurt Dax 8,400 12,530 -32.96 -38.14
FTSE 100 5,006 7,277 -31.21 -34.26
Hang Seng 22,167 27,044 -18.03 -52.52
NIFTY 7,833 11,590 -32.42 -51.16
Nikkei 225 16,698 22,059 -24.3 -45.76
Paris CAC 40 3,726 5,636 -33.88 -35.72
S&P500 2,281 3,043 -25.06 -39.46
Shanghai Composite 2,729 2,943 -7.27 -50.3

The above table shows last low price [1] of global indices along with their respective 200 SMA [2]. We measure the % difference between the last low price and 200 SMA [3] to see where the markets stand right now. We can also get a perspective by seeing how far prices have ever dropped below their respective 200 SMA [4].

The last time prices were stretched more than now was during financial crisis in 2008.

All the European indices like Dax, FTSE and CAC are almost stretched from their respective 200 SMA as much as they were in 2008. Dow Jones is also near the 2008 levels.

Asian indices like Hang Seng, Nifty, Nikkei etc. are still not stretched as much as they were in 2008.

There isn't a rule which says that an index can stretch only to a certain number below the 200 SMA. But looking at what the markets have done in the past it seems that bottom may be closer for American and European indices than it is for Asian indices.

What does this mean for your investments?

This suggests that though the developed markets may be closer to their bottom but it may not necessarily be the case for Indian markets.

One should be nimble footed and buy in a staggered manner since one could get the benefit of buying at better prices.

Warm regards,


Apurva Sheth
Editor, Breakout Profits
Equitymaster Agora Research Private Limited (Research Analyst)

PS: The market is increasingly fearful, and you must gird your loins at this time and be greedy. It is not easy - but for the sake of your wealth it is important. Just start with Richa's highest conviction small cap stock and take it from there. You can get it here.

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2 Responses to "How Much Will Global Markets Suffer from Corona Crash?"

RAVI SHAH

Mar 21, 2020

thanks Apurva seth for your fantastic crash corona report.If world does not end then we can get good insight thru the report of impending correction.Thanks again.

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Raghavan

Mar 20, 2020

Dear Editors,
one point noted, all 3X editors have diverse views in current market scenario, with some recommending buy and one saying wait for market to bottom before purchase.

You have also said in articles that you cannot time the market! value buys exist in bull market as well exists more in bear market like current strange scenario.

Please explain what is correct strategy. My belief is buy in small lots and average over time since no one can predict bottom. But it is also difficult strategy since we need follow capital allocation strategy. In that direction dividend stock is good since it will give some returns yearly

thanks and regards,
Raghavan

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