It’s day three of the “coronavirus dip” and bulls are returning to the market. On the advice of value-seeking analysts, investors are looking to buy American stocks after a two-session plunge. The S&P (+1.10%), Dow (1.15%), and Nasdaq Composite (+1.70%) are all making a comeback as a result.
It’s a welcome turn of events but somewhat expected. Historically, the market has recovered from “flash crashes” when sentiment shifts too quickly. Since 1997, there have been eight different two-day Dow drops of 6% or more (excluding the current one). In six of those declines, stocks recovered their losses over the next two weeks.
The only times the market didn’t rally? In the months following the dot com bubble and subprime mortgage crisis.
In other words, stocks are likely to return to form, unless the outbreak becomes a true crisis, like those of 2000-2001 and 2008.
“Mad Money” host Jim Cramer, who recently said that a coronavirus-lead decrease could create a “bull trap,” now believes equities are safe to buy.
“I think you’ve got to start buying something,” said Cramer on CNBC’s “Squawk on the Street.”
He continued, adding that while it’s not time to go “all in,” cash-rich investors could take a shot on certain companies with rebound potential.
“If you have a lot of cash, let’s say you have 20% cash, you’re not going to put 1% to work?” Cramer said.
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“Are you really going to think that nobody has anything going on?”
That’s not to say that Cramer thinks the market won’t fall further, though. If more confirmed cases arise in the U.S., or god forbid, a coronavirus-related death occurs, stocks could easily go lower.
“If you haven’t put anything to work, I think you’re playing with fire,” he said, referencing the danger of missing out on a snapback rally by remaining in cash.
“Look I would obviously say put it all to work if I felt you didn’t have these other shoes [to drop].”
Cramer argued that, despite the obvious downside risks, there’s an equal chance that health officials “do something good, and you’ll have bought nothing.”
“Am I optimistic?” he asked.
“No […] I’m just not as negative as I was.”
And while Cramer is usually accurate in taking the market’s temperature – particularly when investors are panic-selling – his timing today might be a little off.
It’s true that stocks are rising this morning, but it’s also true that we’re just one headline away from another plunge. Or, alternatively, a breakthrough in combating the outbreak, sending stocks higher.
Nobody, save for those working on a vaccine, knows what’s going to happen. Taking a flyer on a “headline play,” even with a small portion of your portfolio, is a poor move.
Instead, it’s likely wiser to wait for the market to gain some traction first. The S&P 500 is still trading 2.3% below yesterday’s high, after all.
Until the index surpasses a level of nearby price resistance, it could easily keep deflating.
Buying now, before we have any shred of evidence that the coronavirus is slowing, is essentially gambling. And, as many successful investors will tell you, routinely making 50/50 trades is a recipe for disaster. If that’s your game, binary options – options contracts that return either a fixed amount or nothing at all – might be more suitable.
Especially since, given the market’s current momentum, stocks might actually be headed lower before they put together a short-term rally.