A Great Sale is Here.

First the fundamentals. I believe the Coronavirus has plunged the world into a recession for 1Q and 2Q 2020 GDP. But how long will it persist and what will be the impact on the earnings of stocks and their valuation?

This video by Aswath Damodaran will give us some idea. Now he made this video five days ago as of this posting so he probably hasn't seen the 3 to 6% plunge on Thur and Fri. 


https://www.youtube.com/watch?v=1vJdCpVxO7s&t=27s

The impact on earnings is probably 5 to 10% for FY2020. Valuation of stocks probably by the same amount using DCF of 10 years with a discount rate of around 5.8%.

We also know that stock markets are driven by liquidity.

https://www.bloomberg.com/amp/news/articles/2020-03-01/no-place-to-hide-for-markets-looking-for-central-bank-salvation

There is likely to be a significant rebound from here. 1) it's oversold, 2) liquidity find a home, 3) bond yields are zero so stocks are more attractive, 4) VIX is over bought. 5) there's maximum fear among retail investors, 6) GDP numbers are likely to improve significantly from 3Q onwards.


Above is the S&P500 chart. you can see that it has broken below the 50, 150, 200 days moving averages. The RSI is in oversold territory.


If you use the weekly chart and stretch back to 2015, you can see that the index has gotten higher and higher. Each correction is a buying opportunity.

If you panic, always stretch out the chart over 3, 5 and 10 years. You will get a perspective.


This is the minute candle sticks and it shows a last minute buying in high volume. Some program buying happened on Friday night.


Going forward, it can either rebound and reach half of the correction, i.e. around 6 to 7% rebound, then resume to test the support. In this case it is likely to reverse a bull run into a bear. It could push higher to retest the January high, and if it clears, it is likely a resumption of a bull run.

Either way, I'm adding positions now, gradually. When it retraces around 6 to 7% I am putting on put options and inverse ETF to hedge my bets.



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