I’ve been tracking coronavirus stocks since late January. We made a lot of money in those stocks in the beginning. We lost money and stopped out before we stopped trading them. Wonder what they are doing now? Take a look.
Lessons From These Coronavirus Stocks
Each one of the stocks above looks pretty much the same. If you continued trading these stocks you likely lost a lot of money or, you’re underwater in one or more of them hoping that it’s going to come back.
There’s a very important lesson to learn here about the over-reliance on catalysts.
Why Does a Stock Go Up?
Does a catalyst make a stock go up? Does a chart pattern make a stock go up? Do fundamentals make a stock go up? No. These things make a stock go up as a derivative of the true reason a stock goes up: other traders put their money in the stock.
A catalyst, say a coronavirus test that’s faster and cheaper than the current coronavirus test, does not make a stock go up. A stock will only go up if the coronavirus test catalyst convinces other traders to put their money in that stock. The true reason a stock goes up is that other traders put their money in that stock.
Over Reliance On Catalysts, Fundamentals, and Technical Analysis
All of the stock charts above look the same. That’s because traders are pulling their money out of markets. Catalysts are not convincing traders to put their money into a stock. Neither are fundamentals and technicals. To pretend otherwise is to close your eyes to these charts.
You’ve heard the saying, there’s always a bull market going on somewhere. That’s misleading. Shorts are going up but that’s not a bull market in short ETFs, that’s a Bear market. There is not always a bull market going on somewhere in a Bear market else it wouldn’t be called a Bear market.
After a decade of being in a Bull market, many traders forgot what a Bear market is like. Everything is sold in a Bear market and the baby is definitely thrown out with the bath water.
In a Bear market, any stock that peeks its head up is quickly chopped off. If a stock runs one or two days, it gets the attention of the algos which target it to clear the stops or programmed sell the rip trades are executed.
In a Bear market, the entire market is a big stadium with matadors ready to kill Bulls. It’s a giant Bull trap of no return. Bulls die a slow death by a hundred cuts from the matadors, and then are stabbed with a sword and their bodies are dragged out of the stadium and sent to the slaughter house.
Many Bulls are still trying to play the long side as their trading accounts slowly bleed out. This is an irrational market, they say. Surely this stock is so cheap that a buy the dip strategy will work! Markets can remain irrational longer than most can remain solvent. Any trader under the age of 30 is probably trading like this because they don’t know any better. They will die a slow death of loss after loss and ultimately their trading accounts will go to zero.
Nothing Is Immune From The Selling
As traders and investors sell out of everything to raise the cash needed for margin calls and living expenses, nothing is immune from going down.
A muni-market selloff that started last week is snowballing, pushing up state and local authorities’ cost of borrowing over a one-week period. Investors pulled $12.2 billion from municipal bond funds over the week ended March 18, the most of any week on record, according to Lipper. The second-largest outflow was $4.5 billion.
Many municipalities are set to go bankrupt and stiff their bond holders which is why money is being pulled out of them quickly. Think about it. Revenue to state and local governments is falling because of stay-at-home orders by government officials. At the same time that economic activity has come to a sudden halt, there is a huge jump in unemployment. Of course investors are withdrawing record amounts of cash from the municipal bond market before cities start filing for bankruptcy protection.
This selling has hit institutional investment firms hard. “We cannot state with enough emphasis how significant the selling pressure has been on many of the institutional funds,” wrote Tom Kozlik, head of municipal strategy and credit with Hilltop Securities, in a recent note. Therefore, institutional investors are using algos to clear the stops, sell the rips, and do whatever they can to make up the shortfall by attacking retail traders and investors.
Wave of Municipal Bond Defaults Coming
Without the Federal Reserve purchasing a huge amount of municipal bonds, we are going to see a wave of municipal bond defaults over the next few months. Hopefully shutdowns will not last more than a couple of weeks. Markets can withstand a two week shutdown which seems to be the plan of many states. Markets can not withstand a two month shutdown.