Forty years of trading experience have taught Trevor Neil, technical analyst and founder of BETA Group, that market crashes can happen at any time. He has, after all, lived and traded through the stock market downturns of the 1970s and the financial crash of 2008. This time, however, is different.
“Can you think back only six weeks ago? Could you have said this market is going to drop a third in a matter of weeks as a result of a pandemic?” he asks
“No, that was a Black Swan. You could not have described it.”
Neil reflects on how other market tops have been considerably more gradual. He also highlights another common trait among previous events. “Mostly, those events have ended with a V-shaped bottom. The financial crash, he says, was “climatic”. The turnaround too though very fast, and new gains were even made.
However, that was just one kind of crash. In the 1930s, Neil notes, the markets continued down for years after the actual crash, with a long time taken to recover and make new highs. The same, he says, was true in the 1970s. However, this is not the norm.
"You might say it's more likely we have another V-shaped bottom than a complex and painful and drifting sort of bottom.”
The eventual shape recovery of the pandemic-induced downturn, however, is still up for debate.
Listen to the full podcast episode here:
The shape of things to come
One thing that Neil believes is that if the markets do manage to achieve a consistent V-shaped recovery pattern, then the sectors that led the market down will be the sectors to lead it back up.
“The things which are most bombed out and most hated and most despised as investments will be the big things which will bounce most violently,” he says.
Throughout this meltdown, the biggest declines have been led by the materials sector, which was the hardest hit in the US, as well as energy, industrials and financials. “These are the worst sectors [but these are also] the sectors where I would expect to flick around and rotate and … lead us out again.”
“I think that as soon as the pressures off, those things will flick back into being the best performing picks,” he adds.
“I think that as soon as the pressures off, those things will flick back into being the best performing picks”
Looking out for clues
According to Neil, that is the clue that we have made the bottom. Markets, he says, are already thinking and pricing beyond the peak of the coronavirus pandemic.
Three months ago, if you were to say that 10,000 people would die soon from an unknown illness you would have been horrified. But now you might be saying, that wasn’t a bad result compared to the alternative, Neil explains.
The market is thinking and pricing ahead based on how bad the pandemic will be and how quickly we will recover — given that both supply and demand have been disrupted.
There are signs that make us believe that we will recover fast and eventually make new highs, however, there are also factors that make us believe that will not be the case. If countries take a more divided approach after the downturn, for instance.
The price is right… sometimes
The only thing traders do know is the price, says Neil. This is all the known facts but also people’s “hopes, expectations and fears about the future”.
However, as Neil says, the devil is knowing how this information is being evaluated by the market. “That we can track it in the price. If we know the price, actually we know everything.”
Neil recognises that a market has momentum and trends that tend to persist, as people drive market sentiment based on what they think of the news and data. “I know whether things have improved because I watch the price and the price will tell me.”
“I know whether things have improved because I watch the price and the price will tell me”
However, volatility of the kind we are experiencing now should be part of a trading strategy. Neil suggests that traders may have to change the way they work during these times.
“A friend of mine once said: ‘when the wind blows strong enough, even turkeys can fly’. But we're not in that condition now. Now you have to be precise, you have to be very careful and you have to get it right.”
You can also listen to previous episodes of our podcast via our YouTube channel.
Disclaimer Past performance is not a reliable indicator of future results.
CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.
CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.
*Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.