by Ivan Martchev

March 17, 2020

This is the first pandemic sell-off in my career, a career which spans over two decades, including a tech bubble, a real-estate bubble, a financial system near-collapse, and all kinds of other smaller panics. Of all of the above, this sell-off has been the fastest and least warranted. With some preparedness, the damage could have been significantly smaller, as the cases of China and South Korea show. Both countries had different responses, and both have seen a dramatic fall in new cases of COVID-19, so it can be done.

Volatility Index Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The United States is behind the curve in its response to COVID-19 because federal authorities have underestimated the virus’s ability to spread globally. This situation is completely fixable, in the sense that if the necessary measures are taken, the occurrence of new cases can be on a steady decline by May or June. A plateau and decline in new cases is what the stock market is looking for, and that will come soon.

If we look at two panic indicators – the 10-year yield and the S&P 500 Volatility Index – both indicate a selling climax. The 10-year Treasury yield went below 0.40% on Monday last week, but it has rebounded steadily to close last week at 1.02%. The VIX index has been as high as 75 on a closing basis (higher intraday) but it had a dramatic decline on Friday to close at 57. The VIX index rarely goes higher, except in 2008, which was a lot more serious situation than we face today.

The action in both Treasury bonds and the VIX indicate a selling climax in the stock market.

This selling panic is similar to a tsunami. It comes hard and fast, but when the water recedes it is over, and it creates a boost to economic performance as all the demand from the empty streets creates the recovery. The U.S. economy was accelerating before this happened and it was in overall good shape, so the rebound with low interest rates and government spending will be much faster. It is entirely possible that if the U.S. government response is as effective as that of South Korea, there won’t be a recession.

Standard and Poor's 500 Large Cap Index Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Until there is a plateau in new cases, the market may revisit last week’s lows, as after such a selling climax there is usually a retest of the lows. In that regard, the December 2018 low in the S&P 500 was unusual in that there was no such retest. The 1998 sell-off in the S&P 500 did have an early September climactic low, a slightly lower retest a month later, and a new high by year-end. The 1998 S&P sell-off was of similar magnitude in percentage terms, but it was at a much lower level of the index, as it started near 1200; this one started near 3400.

Even Gold Bullion Says There is a Fear Climax

Gold, the ultimate hard asset, and an asset which loves low interest rates, deficit spending, and investor panic, sold off late last week. Since I expect more deficit spending as a fiscal response to the COVID-19 panic, more QE from the Fed, and more investor worries, I think gold bullion will finish higher by 2020 than where it is today. In that regard, gold is probably a buy, trading near its 200-day moving average.

Gold Shares Index Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The present panic sell-off serves as a painful reminder that leveraged ETFs are for short-term traders only, and not for buy and hold investors. Losses can cascade and get multiplied by a factor of 3X on a daily basis and there will be no coming back for the leveraged investments like Direxion Junior Gold Miners Index Bull 3X Shares (JNUG) or the Direxion Gold Miners Index Bull 3X Shares (NUGT).

Direxion Gold Miners Index Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

On the other hand, non-leveraged ETFs of gold miners can be interesting. Both the VanEck Vectors Gold Miners ETF (GDX, below) and its junior-miner version (GDXJ) sold off near levels where they were when the price of gold bullion was near $1200/oz. Since the price of gold bullion is significantly higher, those two don’t have a leverage problem and will likely rebound significantly from present levels.

VanEck Vectors Gold Miners ETF Index Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

If there ever was a case of throwing the baby out with the bath water, GDX and GDXJ would be it. But I have never believed financial markets are efficient, so this is an opportunity to use it to your advantage.

All content above represents the opinion of Ivan Martchev of Navellier & Associates, Inc.

Please see important disclosures below.

About The Author

Ivan Martchev
INVESTMENT STRATEGIST

Ivan Martchev is an investment strategist with Navellier.  Previously, Ivan served as editorial director at InvestorPlace Media. Ivan was editor of Louis Rukeyser’s Mutual Funds and associate editor of Personal Finance. Ivan is also co-author of The Silk Road to Riches (Financial Times Press). The book provided analysis of geopolitical issues and investment strategy in natural resources and emerging markets with an emphasis on Asia. The book also correctly predicted the collapse in the U.S. real estate market, the rise of precious metals, and the resulting increased investor interest in emerging markets. Ivan’s commentaries have been published by MSNBC, The Motley Fool, MarketWatch, and others. All content of “Global Mail” represents the opinion of Ivan Martchev

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