When Fear Drives the Market, It Is the Decisive Moment to “Buy or Sell”

When fear conquers, one acts out of panic. When greed conquers, one acts out of avarice. Fear and greed are common terms to describe investors’ emotions at the moment of making the decision to buy or sell.

 

What is important is the trigger.

 

When the world first heard of coronavirus, it was probably in January 2020, though the virus started to spread at a slow speed in late December 2019 in Wuhan, China. Then it picked up the pace and spread widely throughout the Hubei province and other cities in China. The virus claimed 3,208 lives in China and infected 80,860 people as of Monday, March 16, 2020.

Now the coronavirus has spread to 157 countries around the world, infected 87,000 people and claimed 3,241 lives. The trigger has been pulled.

When the world is covered in fear, the equity market will be full of concerned investors, which later leads to a panic and a selloff.

 

The selloff in stock markets occurred in early March and reached its peak on March 12-13. March 12 was the day the World Health Organization (WHO) announced the coronavirus a pandemic, while the previous night, the U.S. President Donald Trump banned all travel to Europe and Wall Street plunged more than 5%.

Asia stock markets fell in a range of 5-7%, but the Stock Exchange of Thailand (SET) Index closed the day at 10.80% down, and the Circuit Breaker was triggered in the afternoon session for the first time since October 2008, when the world faced a financial crisis. The Circuit Breaker also triggered again on the next day right after the opening bell, marking it the fifth-time in Thailand’s history.

 

However, the plummet in March 2020 was different from the crash in 2008. According to CNN’s Fear & Greed Index (FGI), the market in 2020 has far more concern than 2008 to the point of extreme fear.

From 0 to 100, where 0 indicates extreme fear and 100 indicates extreme greed, the indicator hit its historical low at 1 on March 12, 2020, alarming extreme fear in the market before making a little bounce to 2 afterward. Nevertheless, 2 was still in extreme fear in FGI. Even during the peak of the financial crisis, the indicator ticked at 12.

This has shown that the market is covered by fear, but the question is are investors too panicked in this situation?

Warren Buffet once said, “be fearful when others are greedy and greedy only when others are fearful”.

 

Dr. Pakorn Peetathawatchai, President of the SET, on March 12 stated that upon looking at the Block Trade and Short-Sell board, both volume and value maintained at the same level as every trading day in the market, which reflected that the decline in the stock market in on March 12 was due to negative sentiment from Wall Street, European markets over the night and regional markets in the current trading sessions.

Moreover, Dr. Pakorn pointed out that currently the P/E and P/BV of Thai stocks had declined to the point that could be invested in for long-term earnings.

 

The current state could be a perfect chance to buy the dips just like Dr. Pakorn said, but analysts also stated that the Thai economy was already reeling from a collapse in the critical tourism sector when countries around the world are in lock-down modes and some even have restrictions of not allowing Thai nationality to enter the country as well.

A drought, which is about to hit its peak in the next month or two, and delayed public spending are additional blows to Thai GDP, leaving the country with the highest odds of recession among Asian nations at 30%.

 

As for the coronavirus, the cause of global plummet in 2020, the American government official said that the first participant in a clinical trial for a vaccine to protect against the coronavirus will receive an experimental dose on Monday.

However, the public health officials stated that it will take a year to 18 months to fully validate any potential vaccine and would be ready for use.

Which means that the virus could hover in the air around us for a while or at least until there is a cure (not the herd immunity like what the UK suggested).

Now it is up to investors’ decision whether to buy the dips or hold on to cash in case the situation prolonged.

The analyst at Capital Nomura Securities indicated that in the case of a market plummet, the support level should be as follows;

1) -0.5SD (standard deviation) with a 14.62x PER, the support level will be at 1,279 points.

2) -1SD with a 13.35x PER, the support level will be at 1,168 points.

3) -1.5SD with a 12.07x PER, the support level will be at 1,056 points.

4) -2SD with a 10.79x PER, the support level will be at 944 points.

 

 

What is CNN’s Fear & Greed Index?

Investors are driven by two emotions: fear and greed. Too much fear can sink stocks well below where they should be. When investors get greedy, they can bid up stock prices way too far.

So what emotion is driving the market now? CNNMoney’s Fear & Greed index makes it clear.

We (CNN) look at 7 indicators:

1) Stock Price Momentum: The S&P 500 (SPX) versus its 125-day moving average.

2) Stock Price Breadth: The volume of shares trading in stocks on the rise versus those declining.

3) Put and Call Options: The put/call ratio, which compares the trading volume of bullish call options relative to the trading volume of bearish put options.

4) Junk Bond Demand: The spread between yields on investment grade bonds and junk bonds.

5) Market Volatility: The VIX (VIX), which measures volatility.

6) Safe Haven Demand: The difference in returns for stocks versus Treasuries.

For each indicator, we look at how far they’ve veered from their average relative to how far they normally veer. We look at each on a scale from 0 – 100. The higher the reading, the greedier investors are being, and 50 is neutral.

Then we put all the indicators together – equally weighted – for a final index reading.

(Source: CNN)