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Is it a Good Time to Pick Up Bargains in the Stock Markets?

With the markets rebounding last week, some investors have questioned if a low is in for the stock markets. However, incoming data suggest the Coronvirus threat is far from over.
Jignesh Davda
Stock Market

After declining for five straight weeks, the S&P 500 posted a gain last week and is on pace to close relatively unchanged this week.

Many stocks are trading at discounted levels which might tempt investors looking for value. But at the same time, can the virus cause more turmoil in the markets?

I think there is still a lot of uncertainty in the markets and I’ll outline some of the things I’m looking at before jumping back in the markets.

Most of what I’m watching is related to data but there is one specific technical indicator to gauge price action in the equity markets. It is the 200-week moving average in the S&P 500.

The index closed below this indicator about three weeks ago which was the first time it did so since 2011. I would have a lot more confidence that the markets are recovering if the S&P 500 scaled back above that indicator.

While I typically pay a lot of attention to technical analysis, I’m focused on something entirely different when it comes to the virus. I’m looking at incoming data that has started to paint a picture of the economic impact the virus is having.

A good example of this is the US unemployment claims data. This report reveals how many new people filed for claims over a one week period.

For the last couple of years, this report typically comes in just above the 200 thousand mark. That is, 200 thousand new people filing for claims in the prior week.

This week’s report revealed 6.6 million new people filing for claims. It followed a reading of 3.3 million last week.

To put this into perspective, yesterday’s report was more than 30 times larger than the recent average. It was also several multiples higher than the peak reached during the financial crises.

Jobless claims data is considered as close to real-time as it gets as it is a weekly report that gets released 5-days after the week ends. In contrast, other reports such as GDP, typically get released 85 days after the reporting period ends.

Similarly, survey data from purchasing managers in the manufacturing and services industry also tends to be forward-looking. Earlier today, the services PMI for the Eurozone fell to the lowest level since the reporting agency started tracking it, about 24 years ago.

The main consideration is that in most countries, the virus outbreak became serious in late February to early March. So any report that reflects data ahead of this period is not likely to serve much of a purpose when trying to understand where the economy is today.

Besides economic data, and perhaps even more importantly, is data on the virus itself.

If you’ve looked at a chart of new cases for any country, you may have noticed that the rise in new cases tends to be parabolic as the virus spreads exponentially.

The expectation is, especially as many countries tighten up their lockdown protocols, that at some point the parabolic rise will stop.

The lockdown should help slow the rise of new cases and, over time, those that have recovered from the virus will develop some immunity to it, helping to stop the spread.

It doesn’t look like we’ve reached that stage yet.

Granted, by the time the economic and virus data stops pointing a gloomy picture, the equity recovery might be well on its way. But, for me at least, I’d rather buy in a bit higher with a stronger conviction that a bulk of the damage is behind us rather than taking the risk now while incoming data suggests the threat is still rising.

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