Market history is an imperfect guide to a unique crisis, but offers valuable perspectives.
I recently came across a statistic that the recent equity market decline was the most rapid 30% drop in history, exceeding even the traumatic periods of the 1930s. Indeed, the beginning of the year, with low volatility and record index highs, now feels very far away. The investors and traders I speak with are struggling to gain insight on what the future might hold for markets. What follows are two broad sources of information that may help us manage risk and reward going forward:
1) Science-based updates on COVID-19: The money managers I work with find only modest value in much of the coverage of the viral outbreak from the mainstream media. Too much is politicized, and not enough is grounded in epidemiological science. Interestingly, some of the best new information is coming out via Twitter. Here are a few contributors that have gained a following among smart investors:
- Trevor Bedford – Trevor’s background as a researcher in infectious disease has been helpful in communicating scientific understanding of the viral outbreak. His Twitter threads provide detail and perspective in a succinct fashion. For those looking to get deeper in the weeds, his website is a deep resource, as is the amazing Nextstrain.org site.
- Helen Branswell – Helen is a healthcare journalist for STAT, with a specialization in infectious disease. The STAT news site has been a very helpful source of updates on the viral outbreak, and Helen’s tweets have highlighted important breaking developments.
- Marc Lipsitch – Marc is a Harvard-based epidemiologist and microbiologist specializing in infectious disease. Marc’s tweets often highlight valuable reports from the mainstream media, and his threads also provide useful detail about the virus and its impact. For further detail, check out the Center for Communicable Disease Dynamics site from the Harvard School of Public Health and their Twitter feed.
- Networking – In the crowdsourcing sense, it’s worth tracking the people who Trevor, Helen, and Marc follow, as they will generally be those with informed, evidence-based perspectives. Curating and following your own information network can provide important clues as to whether the situation with COVID-19—and its impact on the healthcare system—is getting better or worse.
2) Historical Perspectives on Markets – This is a tricky one. History is far from a perfect guide to the future, particularly when the current situation features a truly novel virus. Still, market history can be a valuable framework for generating hypotheses and determining whether current markets are behaving in ways that we’ve seen before. For example, an early sign that the present market situation was indeed a serious one was the market’s inability to rally in the face of short-term oversold conditions that, historically, had led to bounces. Now that we’ve seen some bounce in most risk assets, we can draw upon market history to determine whether this market, like the virus, is novel or whether we’ve seen this movie before. Here are some valuable, data-based sources of historical perspective on markets:
- SentimenTrader – Jason Goepfert and team have done an unusually good job of pushing historical information to traders and investors based upon the most recent market activity, such as this recent tweet tracking buy signals in MACD. One strength of their analyses is the differentiation of shorter and longer-term outcomes, providing a sense for the possible variability of price paths.
- Quantifiable Edges – Rob Hanna and team put together nightly reports looking for price patterns and other variables associated with directional market tendencies. For example, they recently posted an analysis showing bullish intermediate-term outcomes when stocks have posted three consecutive up days with rising issues greater than 70% of the total number traded. QE also posts historical tendencies associated with Federal Reserve balance sheet changes, a unique set of analyses.
- InvestiQuant – Scott Andrews and team take a somewhat different approach to historical analysis that is quite relevant for daytraders and active investors. Covering the majority of futures markets and index ETFs, IQ provides user-friendly menus that enable users to discover their own market patterns. A useful feature provides statistically significant results to users, as illustrated in some of their tweets. This is one of the few platforms that enables traders to conduct their own quantitative analyses without having a detailed background in programming or statistics.
- MarketTells – Rainsford Yang tracks unique market variables, including the NYSE TICK (number of stocks trading on upticks versus downticks) and program trading activity. He pushes studies based on these variables to subscribers via email, such as a recent study of what has happened historically when upticks have exceeded downticks by a wide margin for multiple days. A worthwhile feature is a data archive that allows traders to download data and conduct their own research on historical market patterns.
- Integration – My experience is that, when we have multiple, independent studies coming from different services that point to similar patterns, those analyses are especially worth tracking. Similarly, if we see a bullish tendency in a shorter-term study and one in a longer-term study, that can be useful information. The discretionary trader can use these studies to form hypotheses (not to trade with fixed biases!), observing when real-time price behavior is confirming or disconfirming the historical studies. Indeed, occasions when markets don’t follow their usual historical paths provide us with useful information that we can factor into our subsequent risk taking and risk management.
At first blush, nothing could seem more different than sites devoted to epidemiological research and those devoted to financial market research. The common thread, however, is the adoption of evidence-based approaches to our investment and trading decisions. The FiveThirtyEight site has tracked the projections of infectious disease experts regarding the ultimate dimensions of the outbreak and found great variability in predictions. The problem with a novel virus is that it truly is novel; by definition, there is a great deal we can’t know about the future, including possible mutations, seasonal recurrences, and potential treatments or vaccines. We also don’t know how policy responses will evolve and how those might shape the forward path of COVID-19 and its economic impacts. Uncertainty, in such a situation, is a rational response.
In the face of this uncertainty, what we can do is track information day over day, week over week, and use the evidence to update our estimates of potential future outcomes. Going forward, on my TraderFeed blog site, I will be tracking daily shifts in market breadth and changes in yield curve structure to further support those updates. For what it’s worth, several historical studies from the above sources, looking at this past week’s rally in stocks, note an uncertain price path for major stock indexes in the near term, but rather high odds of strength over the next six months to a year. Interestingly, that could also be a time frame in which we have greater visibility as to the efficacy of therapeutics—and even an effective vaccine—for COVID-19. Much of what I will be tracking going forward is whether those scenarios are actually unfolding.