COVID-19 case numbers and the VIX are among the factors that investors should consider before committing substantial new funds back into the stock market
SmallCapPower | March 26, 2020: Ever since the COVID-19 stock market selloff started, many investors have been wondering how low will equity values go. While no one can call a stock market bottom for certain, here are some signs that a sustainable rally for stocks may have begun.
Have confidence that the COVID-19 spread isn’t getting worse
Most of us have heard the phrase “flattening the curve,” but until there’s an indication that COVID-19 is becoming contained globally investors can expect further stock market volatility. It will likely be months before the economic impact of the self-isolations and business shutdowns can be quantified.
Watch the VIX
VIX is the ticker symbol and the popular name for the Chicago Board Options Exchange’s CBOE Volatility Index, a well-followed measure of the stock market’s expectation of volatility based on S&P 500 index options. The VIX has also been referred to as the fear index or fear gauge. The VIX is currently at 61, down from a high of 82.7 reached on March 16, 2020. To put that into perspective, the highest level the VIX hit during the 2008 financial crisis was 80.7. A VIX level in the low 40s would be a good indication that we are back to a more ‘normal’ stock market environment.
Look to global monetary actions
In a recent article on BNN Bloomberg, Andrew McCreath wrote that investors should consider both liquidity and credit. He said he is watching swap spreads, dollar basis, credit spreads, mortgage-backed securities yields and volatility to see if progress is being made as far as global liquidity is concerned. Mr. McCreath contends that spreads are beginning to show some signs of stabilization, but believes it will another few weeks before we could decide whether or not the worst is over. On the credit front, central banks have said they will do whatever it takes, but he thinks it will take a week or more for the Fed to be able to buy corporate debt. Andrew McCreath added that judging by rates on 30-year mortgage-backed securities and muni bonds, it appears there are also still segments of the markets that believe the Fed still has to do more.
All that being said, stock market investors with a longer-term time horizon have done well historically by dollar-cost averaging. Employing the same strategy this time around should also prove effective.
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