Global Volatility and an Oversold Market

 In Strategy Updates

It’s been a volatile and unpredictable market this week and while the stop loss orders are in place, only a few have executed so far. You may recall that stop losses on more volatile stocks are farther away than those on less volatile names to allow for normal corrections, but what is most important to keep in mind is our stop loss strategy is intended to protect against catastrophic decline. Stop losses are not intended to protect short term profits, or mitigate normal market corrections.

We are still within the confines of a normal market correction – though we got here in a hurry. From a technical level stocks are oversold to a point where in the past very big rallies upward have occurred. We would suggest that it’s a possibility within days or weeks. In our view the markets have made dramatic assumptions that this virus will spread rapidly and dampen a fairly strong economy. These assumptions are a bit exaggerated in our opinion which may make certain stock prices at current levels a bargain, as evidenced below:

(Bespoke Research Group)

As we mentioned in our last Strategy Update, the percentage of infected is still very, very small. So why has the market fallen so much in six days? We would say a very overdue correction is most likely the culprit of program selling and emotion.

We are just slightly negative for the year after all of this and believe that the next big move will be higher – even though it may take some time to get there. The Federal Reserve and central banks around the world stand ready to reduce rates and stabilize markets. Additionally, the market is not giving medical science any discount for the possibility of finding an antidote, but today’s sellers should not underestimate medical technology’s ability to find a solution.

We hope this short update is helpful and please do not hesitate to contact us to continue the conversation if you have additional thoughts or questions.

Your Team at Main Street Research

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