“The market can stay illogical a lot longer than you can stay solvent”
That is an old traders’ saying that I was first told decades ago, and I have had to remind myself of it several times this week.
It is, I suppose, possible that coronavirus will be the big one, the biblical plague that punishes mankind for all of its many sins and kills us all. It is far more likely, however that, like H1N1, Ebola, SARS and MERS, it will be contained and forgotten within months, if not weeks.
The important thing for traders and investors at times like this is to avoid being infected by the panic, which is the most contagious thing around at the moment, but to still understand its power. Much of that power comes from the way traders view it.
The Trader’s Mindset During A Panic
The Queen Mother was a much-loved Royal figure in the U.K., but like all royals, had no real influence on policy or the economy. She died in 2002 at the age of 101, but for years before her death there were frequent reports that she had either died already or was about to.
On one of those occasions, I was working on the GBP/USD (known as cable in the forex market) desk in London. When the “news” hit our screens, the first voice we heard was that of the oldest guy on the desk, a thirty-year veteran of the dealing room.
“What did we do last time she died?” he asked, “Did we buy it or sell it?”
I still laugh when I think of that, but there is a serious point.
To traders, the reason for a move is often irrelevant, what matters is its direction and intensity. You don’t have to believe that the Queen Mother’s death, or the spread of coronavirus, or anything else will have a big lasting impact on the market to try and profit from it.
Is it Time to Look for A Bounce?
The short answer is no, not yet. The panic is still in full flow, and even if you believe the runaway freight train should stop, standing in front of it is not a good idea.
It is a good time, however, to look for things that might cause it to stop. There are a couple of things coming up that fit that bill.
OPEC+ will meet next week, and a firm commitment from that meeting to cut output even further could cause a turnaround.
From a technical perspective, Brent is currently right around a support level at $50, and WTI is just a couple of bucks away from the equally significant $42 level. Either or both of those supports holding, particularly if coupled with a fundamental shift in supply dynamics, could cause a turnaround.
For now, though, especially with another weekend of scary headlines ahead, patience is the best policy.