Investors need to take cover. The stock market is in for a “lightning-bolt” collapse.
This is one of the most dangerous setups. That’s because it strikes when most investors think the coast is clear.
Today’s crisis is not the same as the one in 2008. But the nature of that decline is as useful as ever for spotting what could happen next.
That’s because events are different – But our reactions aren’t.
You may be tempted to start buying again. But my analysis tells me there is a 22% lightning-bolt collapse still to come.
Take a look at this chart from 2008 that shows stocks (black-line) falling after fear (red-line) peaked.
I’m measuring fear using the VIX volatility index. I like to call this the “fear” index.
The more erratic the market, the sharper it spikes.
The shaded grey area marks the time from when volatility peaked until stocks bottomed.
That stretch of declines lasted 19 weeks — nearly five months — after investor fear maxed out.
Volatility Changes Things
Fear about the virus may have already peaked, but the number of infections and economic turmoil is still climbing.
The virus is forcing the economy to change.
Investors are also evolving.
When volatility is low, investors are calm, markets are stable and risk is an afterthought.
When volatility is high, investors are frantic, markets are turbulent and risk is a boogeyman.
The market falls when volatility spikes because investors are forced to reevaluate risk.
When investors are fearful, they sell their most risky exposure. Fear-driven selling creates a feedback loop that increases volatility and causes more selling.
Eventually, investors sell their least-risky market exposure too.
That’s when we know investor fear has peaked.
Unfortunately, that doesn’t mean the market will stop falling.
Wait for the Lightning-Bolt Collapse
Last week’s rebound could end this week.
And I expect a lightning-bolt collapse to send shares falling to new lows.
I expect the S&P 500 Index to test its low around 2,175. Then fall to 2,000 — a 22% drop from current levels — or even lower.
So, be careful.
And be selective when you feel ready to start buying again.
Buy companies with low debt and steady cash flow.
Think large-cap stocks on companies that have a history of riding out volatility and bear markets. Think stocks on companies that serve the world’s quickened pace of taking things online.
Avoid companies with unproven business models that depend on investors’ willingness to take on lopsided risk.
Editor, Apex Profit Alert