It’s funny listening to the stock market pundits try to explain the stock market drop the past few days. Though the drop in the Japanese yen and inverted yield curve have received some air time, the coronavirus outbreak seems to be winning the latest hair-on-fire narrative being spewed by the main stream media.
Investors are a curious bunch. We always want to know why a stock goes up or down, and there are a host of folks out there who make their living giving us answers. But most times these market “gurus” are just plain wrong.
The coronavirus isn’t causing this stock market drop. It’s simply the easiest and most believable explanation the so-called experts are pulling out of their bags.
You see folks, the stock market is traded by people, and wherever people are involved, emotions are right there with us. At times emotions run high and everyone wants to buy, while other times they run low and everyone wants to sell. We’ve been on a sugar high for a while with the FOMO crowd bidding up stocks, and it was simply time to turn lower, and the coronavirus is the most handy reason available.
The market is pulling back because lots of individual stocks were way over loved and overbought, and were destined to pull back. That’s it. Everyone went way too gaga for stocks, driving prices up too high too quickly, and just like a rubber band, sentiment had to snap back some. It’s not much more complicated than that.
We could see signs of a pullback coming. The market was trading 12% higher than its 200 day moving average, and was three standard deviations from the mean. History tells us that when this happens, a correction should ensue. To top it all off, the relative strength began diverging from the price of lots of stocks several weeks ago, signaling a weakening of the market and increased odds of a pullback.
We don’t believe this is any more than a normal, long-overdue pullback, and not a time to hit the panic button. The coronavirus, though nothing to sneeze at, will be contained shortly, and the main stream media will move on to some fresh new narrative on why the stock market is doing what it’s doing. But as always, keep an eye on your stocks.