Covid Market Collapse Is Affecting My Stock Charts

The Covid Crash makes all investment analysis just a bit tougher

For your sake, I hope you don’t watch the stock market as intensely as my team and I do. Because in the wake of the Covid collapse and reflex-rally during the past 8 months, it has turned “traditional” investment and market analysis into a different beast. The good news: that may just lead to greater opportunities in the months and years ahead, especially for hedged investors.

Short-term: filling the gap to the old highs?

There has been a consistent pattern since the summer. The market often opens higher, floats around that level for much of the day, then gives back perhaps 0.25%-0.50% of its value in the final hour. From my experience, that’s a message from the market: tactical investing is fine, but long-term, buy-and-hold investing is likely to be a trap. It is a sign that day-traders are more prevalent.

That can be helpful for a while. But at a time when margin debt and debt overall continues to rise, it can accelerate the next selloff. In fact, I’d argue that it is why the February-March Covid Market collapse was 33% for the S&P 500, instead of perhaps half that amount.

Short-term rally?

The good news for now: the market might just have a little more juice in it, as the major indexes and market sectors take aim at their recent all-time highs. Those “gaps” might just be filled in the near-term.

After all, there are still a few weeks until the election. And, if the election outcome is clear in early November, perhaps that is a reason to celebrate, and see marginal new highs.

But then what? That just completes another trip on that hamster wheel.

And that’s what the longer-term charts indicate: a historically overvalued market, particularly in the “headline” indexes like S&P 500 and NasdaqNDAQ+1.1%.

What do we do with these cross-currents where the short-term looks friendly, but the intermediate term looks historically overvalued?

Don’t get sucked in!

We avoid getting sucked in by it. But it does have the secondary effect of screwing up the shorter-term charts. That is something we continue to monitor. After all, it’s very late in the bull cycle.

One thing this will do is prompt me to start looking more closely at the level of trading volume. In recent years, I have not considered that to be especially helpful, as price patterns alone provided more than sufficient information to make confident decisions. 

However, the recent severe lull is enough to bring volume analysis back into the picture for me. This is likely due to sheer confusion and hesitation over the election and stimulus talks. The bottom-line is that rallies with low volume are not as trustworthy as those with heavy trading volume. It’s the basic concept of liquidity. Low liquidity creates opportunity for jumpiness in stock and ETF prices. 

The same thing is true on the downside. A down move on low volume is often less believable and sustainable than a down move on strong, increasing volume.  

Hedged investing means never having to feel rushed

This is all to say that the best thing to do as an investor today is to not be in a rush. That’s where it helps to be a hedged investor. 

Because whichever way the market breaks from this latest period of “up and down leading to nowhere,” it helps to have some part of your portfolio that can capitalize on that. Eventually, just understanding where the current market climate falls within a group of dimensions (risk, reward, speculation, conviction, etc.) is helpful for an investor. 

That’s what having investment perspective is all about.

Related: Hunting For Value In S&P 500 Sectors