The bad news about the coronavirus is affecting us all and therefore the stock market. If you read any online newspaper, you will likely find a live feed of news like the one they do with football matches on the weekend or Champions League days informing about the latest news. It certainly does not help to keep calm. Is this enough to crash the stock market?
If we look at the FTSE 100 Index Total Return (including dividends), at the moment of writing this article, it is around 6,120. Alarms went off on February 24, and in five days the index has lost around 12 percent. For an index, these are great numbers because it means that there are a good amount of stocks losing more than 15 percent and some of them more than 20 percent.
Drops are usually faster than rises, and we will need weeks to recover from this. Is this something to be worried about?
Maybe you shouldn’t be very worried, but it is something that is worth follow. The index broke the first support around 6.430, so now we can expect it to continue going down to get closer to the next one which is at 5,900 – 5,800, in other words an extra 5 to 6 percent of losses. If we include the dividends, this level would be similar to the low reached on Christmas of 2018.
Are we saying that you should sell if that level is surpassed? We cannot tell you what to do. This is just proof of how important it is to work with stops and respect them. If you have done so, you may have experienced some losses until now, but nothing dramatic. If you have not, now you have some stocks falling in a situation in which it is difficult to make the decision to sell or hold.
While we are above the 5,800 level, we cannot say we are about to have a stock market crash. The FTSE 100’s last top was higher than the previous one, and we have not broken the support. On the other hand, we have broken the trend line that connected the lows in 2016 and 2018, so those that want to play it aggressively can go out and wait a little to see what happens.
It is time to look at important support areas and try to enter in the strongest stocks with tight stop-losses. If the market goes back to the positive trend, which for now we think it will, they can be good opportunities. If it does not, the stops will go off, and losses should be reasonable.
Our last idea is to avoid stocks that were falling quickly even before this last general correction. Big names like Daimler or Renault, for example, may seem very cheap, but they were not behaving well even when the market was rising. So we would keep them out of the options. If we were going to do something, we would try to go with strong positive trends.
*This article is just a subjective opinion and does not intend to be financial advice of any kind.
To see an up to date picture of where the current indexes stand, view our live stock chart.