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Coronavirus Is Turning Market Psychology Negative: Is Panic Selling Next?

2 | By Shah Gilani

The big selloff yesterday, as broad and deep as it was, coming on huge volume, wasn’t unexpected.

Historically, some of the markets’ biggest drops have come on Mondays.

Typically, the previous week’s selling, whatever triggers it, crescendos on Friday afternoon before markets close for the weekend.

As scared investors worry that more bad news over the weekend will tank stocks on Monday, they sell futures, which draws attention to Monday’s expected weak opening – making a Monday selloff almost self-fulfilling.

Coronavirus fears triggered all that last week with investors shedding stocks going into the weekend and selling futures right up to the open. That’s why Monday’s big selloff wasn’t unexpected.

But it wasn’t panic selling. For the most part, selling Monday was orderly.

The worst news of the day was benchmark indexes couldn’t bounce and ended near intraday lows.

What’s happening right before our eyes is investor psychology turning negative.

The question investors should be asking now is, will more negative news and fear trigger panic selling?

It could and probably will.

Here’s what’s changed, what could trigger panic selling, how to see it coming and what to do about it.

Market Psychology Is a Function of Investor Psychology

Market psychology, because markets act as if they’re human, is a function of investor psychology, which more often than not ends up being mass psychology.

The simple fact is capital moves markets (buying and selling), but psychology moves capital.

That means fear and greed rule.

Greed’s been the overriding motivator as this bull market’s ripped higher, including leaping higher after every dip or quasi-correction. “Buy the dip” mentality has paid off handsomely for more than 10 years.

Of course, there are a multitude of factors motivating investor psychology: record low interest rates, a growing economy, low unemployment, the Fed’s articulated “wealth effect” policy (elevating equity markets so consumers feel wealthier), and the passive investing trend proving its genius (as more money plows into benchmark index funds lifting the big-cap names to higher highs and market indexes higher, which draws in more passive investment capital).

That’s positive psychology at work moving capital into markets.

All that’s on the verge of changing.

This Is What’s Impacting Investor Psychology Right Now

While there may be several worries over the horizon, what’s impacting psychology now is Covid-19.

The coronavirus isn’t just hitting equities, it’s hitting economies. That combination is changing how investors feel about the future. It’s changing psychology, it’s turning it negative.

Because there isn’t likely to be a quick resolution to the deadly spreading coronavirus, investors are just starting to contemplate how long the epidemic will last, how it will impact global economic growth, and what it will do to equities.

Psychology isn’t totally negative…yet.

There’s talk about a “V” shaped recovery, talk about bargain hunting in beaten-down industries and market sectors, and talk about sidelined capital coming in at market “support” levels.

But that’s just talk.

The reality is no one knows if the coronavirus epidemic is going to turn into a pandemic or if it hasn’t already reached that status and the World Health Organization isn’t calling it that because they don’t want to panic the public.

But panic is out there.

And markets are prone to panic selling if current on-the-edge psychology turns into mass negative psychology.

I’ve warned for years, increasing my warning every quarter, that those passive investors pouring trillions of dollars into index funds – which have lifted markets well beyond where fundamentals or even “technicals” would justify – could turn “active” and start selling their funds.

That’s what would lead to mass panic selling.

It’s out there, just a sure as the coronavirus is out there.

Now’s the time to put in your stop-loss orders, take profits, and start raising cash.

Markets are likely headed another 10% to 20% lower because psychology is changing every day, getting more negative the longer the coronavirus spreads globally.

What’s important to watch now are market support levels.

The Dow’s near-term 28,000 support level was broken yesterday.

Watch if it breaks below that again. If it does, watch to see how it reacts when it gets to yesterday’s low of 27,912. If it breaks through that level on momentum selling, the Dow’s going to test 27,000 in a matter of days.

If you watch the S&P 500, watch 3,200; that’s support. That level wasn’t breached yesterday, but we got close when the index hit 3,212. The next support for the S&P 500 is 3,100.

The Nasdaq Composite’s near-term support is 9,150. It got as low as 9,166 yesterday but didn’t break its near support. If the index breaks that support, its next stop is support at 9,000. Below that, it’s 8,500.

Investors must watch these important support levels and gauge psychology as we approach them and potentially break down through support.

If “orderly” selling reaches panic levels, it will be hard to get sell orders down fast enough.

That’s why it’s important to have a plan now.

You’ve been warned.

Sincerely,

Shah

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2 Responses to Coronavirus Is Turning Market Psychology Negative: Is Panic Selling Next?

  1. Richard W Birarda says:

    What should I short to take advantage of a declining market. ??

    What puts should I look at to buy ?

    Thank you
    Richard

  2. randy a says:

    a bump in the road. the market caught a cold. Havent seen so many buying opportunities 4 a while. xom looking good. put ur money down & take ur chance.

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