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Title : Observations During These Unusual Market Conditions
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Observations During These Unusual Market Conditions

I've had a record number of phone calls, emails, and Skype chats in recent days.  The uncertainty of the Coronavirus outbreak and volatility of market reactions has created unusual trading and psychological conditions.  Here are a few takeaways from the conversations:

1)  Many traders focus on the stock market, but the collapse in yields among Treasury instruments is perhaps even more significant.  Who would have thought a little while ago that we would be seeing a 10-year Treasury yield under 1%?  As SentimenTrader notes, this flight to safety has been associated with stock market rallies one to two months forward.

2)  Figuring out who is in control of the market is at least half the battle.  I like Brian Shannon's use of the anchored VWAP for this purpose.  When we see a potential turning point in the market, constructing a VWAP from that point provides a useful reference.  Take note:  That same anchored moving average concept can be applied to the NYSE TICK to identify the balance of buying and selling from a given point.  

3)  Keeping your holding period constant in a fast market exposes you to unexpected risk.  The market is moving much more per minute and per hour than it had last year.  There is more volume trading, and the market is moving more for each unit of volume traded.  Mike Bellafiore notes the value of "scalping" in this environment:  containing the holding period is a form of risk management for the flexible trader.  Getting stuck in fixed opinions has hurt traders recently.  Open mindedness has been every bit as valuable as conviction.

4)  Are we looking at the correct tail risk in the Coronavirus outbreak?  I hear a lot of people talk about the "overreaction" to the virus.  The great majority of people don't die from the virus, you might get sick for a while, and that's it.   But what if antibodies to the virus are weak and people who contract the virus:  a) continue to harbor the virus and spread it and b) are susceptible to reinfection?  A "biphasic" disease would mean that we could be dealing with the fallout from the virus for far longer than expected.  And, yes, we are getting reports of reinfection, which could complicate the burdens placed upon healthcare systems.

Operating with confidence in an uncertain environment is dangerous.  Knowledge begins with what we don't know--and the open-mindedness to continually revise our assumptions as new information emerges.

Further Reading:

The Psychology of Trading Fast Markets

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