Risk Storm

This what panic feels like.  This is worse than February 2018.  This is worse than August 2015.  This is almost as bad as August 2011.  I don't mention December 2018 because that was not a shock waterfall decline, this is.  When you go from low volatility to high volatility, that is what gets you.   It is the train that you don't see coming that runs you over.  When you expect a lot of trains to come by, then you are more careful and less likely to take big risks and get run over. 

I definitely didn't see this big of a move coming.  These waterfall declines are always low probability events.  And usually proceeded by a couple of months of volatile price action.  In 1987, the SPX topped out in late August, and crashed in middle of October.   In 2011, the SPX topped out in early May, and crashed in early August.  In 2015, the SPX topped out in middle of May, and crashed in late August.  All 3 of those waterfall declines were accompanied by tops that involved rising bond yields. 

Same with the waterfall decline in February 2018, which also topped the previous month with rising bond yields in January 2018. 

This time, we had steadily falling bond yields as the SPX made an all time high, and then crashed, which makes it unlike anything anything we've seen over the last 40 years. 

The only way to make sense of the price action is based on the complacent market environment and the massive overvaluation which left it vulnerable to investors panicking during a decline.  But even in similar overvalued markets like 2000, you didn't have this kind of a shocking drop in the SPX. 

Now it is about trading levels here, and as I write, the SPX is trading at 2928 overnight, leaving it in no man's land.  There should be some support around the SPX 2820 level, which is the low in August 2019, and if we somehow go beyond that, then we are talking about the June 2019 lows at 2730.  With this kind of volatility and the likely forced selling that it will precipitate if we go lower, you cannot rule out those kind of moves. 

So if you are looking to play for a bounce, know that you can face a big drawdown before this market bottoms.  But when it does bottom, it will be explosive. 

As it is a Friday, and with weekend coronavirus headlines lurking, the panic will be thick when the US market opens.  I will be looking to buy any panicky dips down towards the 2820-2840 level if they happen today, and if not, I will just wait.  And an  incomplete flush lower today would leave this panicky market vulnerable to a panicky Monday. 

I won't go into the coronavirus as you've got a million newly minted virus experts opining their opinions on pandemic possibilities and macroeconomic effects, but my opinion is that the market wouldn't be trading like this even with bad coronavirus news if traders weren't so bullish after the trade deal late last year and flowing into the new year. 

It is tempting to try to catch the bottom but when things get this volatile, a lot of forced sellling usually comes out so buying early can be painful.  For leveraged traders, its better to miss out on some upside or even miss the bottom completely waiting for great low risk entries rather than put your account at risk of a big blowup chasing the bottom here.