The first battle ended

Virus/market 1:0, that’s how it was supposed to be. Previously, we thought, (quote from analysts at Algebris), that there was nothing left to buy, now- I hope – we’re getting to the point where nothing left to sell.

Since 24 February 24 the stock market has now wiped out the entire US stock market rally of the Donald Trump era. The notable thing about the crown virus in a panic reaction is that the markets have begun to behave as in the old days. This is behind this, according to many, that the shorter flash crash-type corrections that have occurred over the past few years have been driven by algorithmic and high-frequency trading. At the time, it was to fast for people to follow the fall and then the markets bounced back. Currently, as if robots were being turned into reserves, the current fall was easily interpreted by those who had lived through 2008 or even previous stock market crashes.

After the first big fall wave came the bull trap and then “don’t buy the rebound because it’s just dead cat bounce.” The long-forgotten mechanisms have come into effect. Perhaps the impairment of gold is just out of the picture, but it’s easy to understand if you look at margin calls. It is believed that the old, experienced stock traders everywhere took over the rudder, watching each other and producing a textbook, dramatic fall. “We used to think there was nothing left to buy, now we are getting to the place where there is nothing left to sell,” Algebris analysts write. CNN Money’s fear-greed index, compiled from seven commonly used mood indicators, shows an extreme emotional reaction.

Based on that, we can hope to get through the first phase. At this stage, in a period of panic, capital market participants are not yet realising the importance of news, so, apart from a few small surges, the fall seems unstoppable. Some former super-optimistic analysts are predicting Armageddon, calling the central bank’s moves useless. As happened in the 2008 crisis, almost immediately the process that was more dangerous to the global financial system than the stock market crash began: financial markets and credit channels started to dry up and the endless hunger for dollars started. Central banks – as opposed to- responded with immediate and aggressive measures worldwide.

To stabilise the financial markets, all you need is money until the players once again believe that it will be available tomorrow also. But it will take some time. This is the second phase of the stock market crash. This battle must not be lost, because soon we will soon face problems on junk bond market, than in the investment grade world, leading to sovereign debt market problems with unpredictable consequences.

Equity markets are harder to manage. The closure is just oil on fire, as we saw on the Philippine stock exchange, where they plunged 24 percent in the reopening after the two-day break. Short-sell bans, on the other hand, are slowing the pace of the fall. Central bank action is more of a signal for the future – we are ready to go to and even beyond the previously expanded limits – but does not support to much the current share prices. It will be the announced fiscal government programmes of unprecedented scale that we hope will quickly bring the economy into a V-shaped recovery. But markets need one more piece of information to reverse the fall: how long will the epidemic last and when can they get back to work?

As long as we don’t we do not have the answer, we remain in the second phase. This does no mean that the stock market will not fall any longer. Fluctuating movements can be dominant – as we learned from previous crises, drawing the shape of lower lows on the graphs, until the first good news comes. The slope of the upward trend in the third stage will depend on the when and the extent of the economic recovery. At this moment, the old ones can once again pass the brigade to modern trading forms, and if all goes according to our hopes, we can expect a sudden rebound.

It’s a special time when everyone can contribute for a fast recovery. The simplified model published in the Washington Post explains it. Let’s look at the dots and stay home.

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