Investment Idea

Panic is here…but we see a few positive signs

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03/03/2020 | 4 min read
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Yes, it hurts when stock market bubbles burst. There are some graphs that might best illustrate the panic in the market right now. Gold is normally a currency perceived to be a safe haven. But in times of heavy selling in the stock markets, gold also falls, often after an initial rise.

Yes, it hurts when stock market bubbles burst. There are some graphs that might best illustrate the panic in the market right now. Gold is normally a currency perceived to be a safe haven. But in times of heavy selling in the stock markets, gold also falls, often after an initial rise. The rationale for this is that an investor in panic sells, or is simply forced to sell, to cover all other losses. In the event of sharp declines, the margin requirements are not enough, which forces many to deposit new money into their accounts or sell existing holdings, which means that gold is also sold out. Cash is the only secure asset type in these times.


As shown in the graph above, gold fell sharply on Friday closing below Fib 38.2 as well as MA20 now serving as a resistance on the upside. The next level on the downside is made up by Fib 50 and MA50 converging around 1 565.

However, even cash is losing its value as illustrated by a declining USD-index below.


The US dollar falls against other currencies, which is counterintuitive. This is since the USD tend to function as a safe haven currency when markets fall. But the pressure on Fed to cut interest rates has led the capital to move from USD to EUR:


As shown above, EUR/USD is once again trading above the 1.1-level above MA20 as well as Fib 50. MA50 is the next level on the upside.

What rises when everything else falls is bonds. Rising bond prices are pushing down interest rates. There is a self-regulating function in the economy as lower interest rates stimulate the economy in the longer term. In the US, the 10-year yield has now reached the new record low of 1.126 percent. Below is the quarterly graph for the US 10-year yield:


The decline is relatively even spread on S&P500 sectors, which also indicates panic amongst investors when those with the wrong positions obliviously scream sell everything to their brokers.


The media overflows us with vigilant speculation about the Coronavirus. Yes, the mortality rate has a higher than the regular flu. But no, this does not pose a threat to humanity. However, the economic consequences of shutting down countries will be great.

Below is the speed of new Corona-cases. The formula uses the last day's new cases divided by new cases on the previous day.


As long as the growth factor is above 1, the spread is increasing. When the virus drops below the red line, the speed of the spreading is slowing down. But we are not there yet.

The picture below shows the air pollution in China before the infection started to spread and cities were shut down along with the last 24 hours on the right side. There is no evidence that China will be back as the world's factory soon, no matter what is said in the media.


Below shows S&P 500 daily graph. As can be seen the S&P 500 index falls like a waterfall and has swept through the MA200 without any major problems:


The only positive is the bounce from its previous low by early October 2019. Note also that buyers came in the last 30 minutes of trading on Friday, as shown in the 10-minutes graph below:


A bounce upwards and the first resistance can be found around the 3 000-level. Previous low from early October at 2 856 serves as support. A break below that and some sort of level can be identified in the weekly graph below around 2 820:


HYG (an ETF for junk bonds) showed strength on Friday, which is another positive sign. This indicates that there is available capital and that the market is starting to bet on a recovery after the Corona virus without a wave of bankruptcies:


Another positive sign is the Nasdaq index that managed to bounce nicely of MA200 and close Friday´s trading up by 0,3 percent:


Thus, MA200 still serves as support on the downside. MA100 and Fib 50 makes up the first resistance level on the upside.

OMXS30 closed below MA200 and formed a doji (implying uncertainty) during Friday´s trading:


In case of a bounce upwards, MA200 around 1 680 serves as first level of resistance followed by the 1 700-level. The first support on the downside can be found around 1 650 followed by a second support level around 1 620.

The German DAX index has broken through MA200 and managed to close in line with a previous local low from early October. Note how another doji was created in DAX:


A break below 11 845 and the next level on the downside can be found around 11 585 followed by 11 265. In case of a bounce upwards, Thursday low slightly under 12 240 serves as a first level of resistance.

WTI-Oil had a rough Friday and closed the trading close to 45 USD/barrel:


Also worth noticing is how the S&P 500 as well as OMXS30 and DAX has caught up to the loss in copper:


The Tesla share has broken below MA20 as well as EMA9 and the short-term trend is thus falling. However, the stock managed to bounce of its MA50:


But the question is whether the gap can be closed. First, Fib 38.2 needs to be broken as well as the psychologically important 700-level. On the downside Fib 50 around 575 serves as a second resistance after MA50.

Retailer H&M have faced rough time as the rest of the market. In the weekly graph seen below one may see how the share is trading close to support in the shape of a rising trendline and Fib50:


The first resistance to the upside can be found in the daily graph around SEK 180 followed by falling EMA9 and levels around SEK 190:


In case of a break to the downside, the next level can be found in the weekly graph around SEK 160 where MA100 meet up, followed by SEK 158 at Fib 61.8.


This information is in the sole responsibility of the guest author and does not necessarily represent the opinion of Bank Vontobel Europe AG or any other company of the Vontobel Group. The further development of the index or a company as well as its share price depends on a large number of company-, group- and sector-specific as well as economic factors. When forming his investment decision, each investor must take into account the risk of price losses. Please note that investing in these products will not generate ongoing income.

The products are not capital protected, in the worst case a total loss of the invested capital is possible. In the event of insolvency of the issuer and the guarantor, the investor bears the risk of a total loss of his investment. In any case, investors should note that past performance and / or analysts' opinions are no adequate indicator of future performance. The performance of the underlyings depends on a variety of economic, entrepreneurial and political factors that should be taken into account in the formation of a market expectation.