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Coronavirus - Sentiment & Risk by TrendFollower

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Many crisis and shocks have come and gone. Markets will go up and down. Sentiment plays an important role which the re-adjusts risk appetite and risk tolerance. The large and sharp drop in equities tend to come once a decade and there will be many investors who keep cash aside for these very corrections.  

Donald Trump has announced a national emergency for the US. That is serious. Rishi Sunak announced £30bn of spending in the UK Budget and normally this would have led to the UK Stock Market rising but we have seen a sharp sell off. The market is seeing a bleak picture around six months in advance and governments around the world think they can spend their way out of trouble and throw enough money to keep countries just about treading water and floating. This may work I do not know but if it does not then how much more money can countries throw at the problems they face?

The one thing that the Coronavirus has highlighted to me is that what happens in China does not just stay in China anymore. Also the psychological impact of the markets reaction to Coronavirus is significantly important. Those who use market sentiment in their trading model and look at adjusting their risk accordingly can navigate through such a period both successfully and profitably.

 
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Investors and traders are systematically non-rational when it comes to information about risk. I think once you realise that prices can 'Overreact' and 'Under-reactdepending on the information flow and news coming out from the media. The media in my opinion plays a very important role in the sentiment of investors and traders. 
 
For those interested in modelling, 'Systematic Prediction' is where creating predictive models which is influenced by market perceptions can be useful. 
 
Based on my own personal experience when the media is bearish and everyone else is bearish then prices are likely to rise. We may not be at the optimum bearish level yet but when it comes there chances of prices rising increase and if traders and investors and participate at those levels then it allows them to increase their owns chance of increasing their chances for success and profits. 
 
As I am reading material online I am constantly seeing indicators of media bearishness such as emotions like 'FEAR' and sentiments like 'NEGATIVE' are seen. Once we have completed the 'overreaction' phase,  prices will rebound.
 
If you go back historically (please do research this yourself) then you will see that buying on fear is practised by the wealthiest investors in history. 
 
I would like to share two quotes below with the IG Community:
 

“When all are bearish, there is cause for prices to rise.“ ~ Munehisa Honma, 1755.

 

“[T]ry to be fearful when others are greedy and greedy when others are fearful.”

~ Warren Buffett

Now buying on fear can be a data driven strategy. If you look at how hedge funds and other large institutional funds operate then you will see that these are opportunities which can seriously enhance a funds performance. If smaller traders can follow where the institutional money is flowing as early as possible then it can allow individual investors and traders to profit over others who are oblivious to this in the investment/trading strategy. I have stated this before but it is the large institutional traders/investors who move the market prices not the smaller retail traders/investors. 

I personally have seen markets react like this many times of many years so it really does not bother me one bit. As a long term investor I welcome any large corrections and drops as it allows me to invest lump sums and invest at lower prices as I am a longer term investor and buyer rather than a seller at this stage. As a trader it allows me to take advantage of attractive 'shorting' opportunities. 

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@CharlotteIG,

I came across below and felt it was very relevant to this thread and the current scenario the markets are facing/experiencing. 

 

Psychological insight. Market foresight.

Where there are markets, there are emotions. Where there are emotions, there are cycles. Where you understand cycles, you profit.

 

A lot of people use 'Technical Analysis' but I think using it effectively is the most difficult part. Many will use it badly or less effectively. When you start looking closely at data in relation to 'Psychology' and 'Sentiment' then rather than seeing patterns in 'HINDSIGHT' you can see them as they emerge and make trading decisions based on these. 

There are many occasions when 'Information Moves Markets'. Coronavirus is a very good recent/current example. 

I know a lot of people on the IG Community may not appreciate this thread and some of the content I am posting but speaking to those involved in Global Macro Hedge Funds, Quant Traders / Investors, Advisors and Wealth Managers, they all use such techniques to provide a layer which gives them an 'EDGE' over many others.  

A lot of you know will know that I follow trend following principles. Now imagine if you could try and apply 'Timing Trends with Sentiment'. Media sentiment sometimes leads prices at major turning points. You can follow the price trend and time reversals using sentiment moving average crossovers. 

I accept the above does not guarantee trading success or profitability but it can be used in your decision box when trying to make effective trading decisions. 

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Guest another interest rate cut

will the futres drop at the open tonigh or wait to dump at the official us open tomorrow morning as they did when the first cut was announced a few days a go?

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I think the UK is beginning to realise how serious Coronavirus could be if not contained and dealt with effectively.

UK closes down social life as coronavirus outbreak accelerates

https://uk.reuters.com/article/us-health-coronavirus-britain-pubs/uk-closes-down-social-life-as-coronavirus-outbreak-accelerates-idUKKBN2132ZJ

The media is portraying a bleak outlook for the UK in the near term and traders who trade based on news will do so accordingly. Anyone who does not think sentiment, emotion and fear does not play an important role in the markets should just look at the current 'bloodbath' being witnessed. 

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Many believe that investors are overreacting. My opinion is that they are under-reacting. Just do an analysis of how the border closures, all major sports cancelled, flights almost grinding to a half, restaurant closures  etc etc will impact company revenue and results. Already talking about several major international airlines going bust. A drop in the S&P500 to 2,000 would only mean it reverting back to 2016 levels. Compare earnings, P/E ratios, EV and other valuation methods and 2,000 level doesn't seem so unreasonable. Also there is a risk of a credit crunch even after the Central Banks let the taps flow. Bad debts will multiply and reduce bank capital which will weaken banks lending capabilities even if they have access to cheap credit.

 am shorting hard and have done for a month now.

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Guest tommorrows market reaction

do you think we could have a bounce tomorrow after such a big one day down day on the dow  ie 2997 points today?

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Guest tommorrow

do you think there will be a bounce tomorrow after such a big down day in us,-2990 points in the dow?

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Hi guys,

 

Done very well on the sell off's Big question when will it do a correction and how long will it take for this to happen?

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@Eurobonus,

May I ask what you are shorting 'hard' and how did you know to short it a month ago?

What signals/indicators did you use to come to this conclusion? As someone who follows 'trend following' principles I wait for the downward trend to materialise when shorting so I will never get in at the top or sell at the bottom. I will try and get as much as possible in the middle part of the trend. 

@Trevbeats,

No one knows for sure when in terms of timescale there will be a trend reversal and how long this will take. I think news flow on Coronavirus is playing an important role and for me it all depends on how long the bad/negative news lasts and when good/positive news commences. 

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I shorted a month ago because I anticipated that the coronavirus epidemic would spread as flights to and from China was still occurring. The high number of infections and deaths indicated to me that this virus was far more contagious and still quite deadly compared to SARS. So I exited all equities and bought 3,100 strike price put options at $46.70. Then bought put options with a strike price at 2,000 for double digits. So done pretty well for a small investor. For a $4,670 investment, I cashed out $35,000 but if I had waited a day I could have made over $70,000 per option contract. But sitting pretty strong on my 2,000 May PUT options.

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12 hours ago, Trevbeats said:

Hi guys,

 

Done very well on the sell off's Big question when will it do a correction and how long will it take for this to happen?

 

Watch your charts ... it will be revealed first there in the prices ... :D

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54 minutes ago, dmedin said:

 

Watch your charts ... it will be revealed first there in the prices ... :D

I only watch charts to look at trend lines and levels. What I am paying close attention to now are company announcements. For example, Compass just reported that their profits this year will likely fall by at least £225 million or a reduction of over 10%.. With a P/E ratio of around 27, that should mean a reduction in their valuation by about 27%. That's the calculations I am doing to establish a fair value for companies and the market. Even Goldman Sachs have stated that the S&P 500 could fall to 2,000 and once the virus has been contained, could rebound back to 3,200 this year.

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7 minutes ago, Eurobonus said:

I only watch charts to look at trend lines and levels. What I am paying close attention to now are company announcements. For example, Compass just reported that their profits this year will likely fall by at least £225 million or a reduction of over 10%.. With a P/E ratio of around 27, that should mean a reduction in their valuation by about 27%. That's the calculations I am doing to establish a fair value for companies and the market. Even Goldman Sachs have stated that the S&P 500 could fall to 2,000 and once the virus has been contained, could rebound back to 3,200 this year.

 

Hence the reason why all this selling is so seriously stupid and short-sighted ...

 

Like people in general :)

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3 minutes ago, dmedin said:

 

Hence the reason why all this selling is so seriously stupid and short-sighted ...

 

Like people in general :)

Sure -at London School of Economics one of my professors recommended that one of our modules should be psychology. Of course I am taking advantage of the panic by shorting right now and sitting on cash waiting for markets to stabilise and buy much more for my money which will improve my yield tremendously over time. So why not? Also at London Business School, the overriding conclusion from analysis of stock markets show that they are not perfect and irrational behaviour is frequent. People are imperfect so if opportunities arise to take advantage of irrational fear, sell  and then buy buy buy more.

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Guys - after each bounce, the sell off follows. It has almost become a ritual. Furthermore, all the big government announcements for fiscal easing and fiscal stimulus packages have done little to stabilise or provide confidence in the markets. That to me alone says a lot that the worst is far from over. Normally these announcements provide welcome relief from crashes but not this time because people realise that the effects will be far more severe. How many people will lose their jobs? How many companies will fold? How many companies and small businesses will fall into severe debt? How many workers will face massive reductions in their incomes? So even when the coronavirus is contained, DEMAND will be slower to recover as people overall have less money to spend.

PS. Have you noticed an anomaly which is that GOLD has fallen quite sharply recently when normally one would expect the price of gold to increase? That is because people have been so highly leveraged that they have had to sell other assets (gold one of the easier to sell) to meet margin calls. That kind of says that things are really bad!!!

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13 minutes ago, Eurobonus said:

Guys - after each bounce, the sell off follows. It has almost become a ritual. Furthermore, all the big government announcements for fiscal easing and fiscal stimulus packages have done little to stabilise or provide confidence in the markets. That to me alone says a lot that the worst is far from over. Normally these announcements provide welcome relief from crashes but not this time because people realise that the effects will be far more severe. How many people will lose their jobs? How many companies will fold? How many companies and small businesses will fall into severe debt? How many workers will face massive reductions in their incomes? So even when the coronavirus is contained, DEMAND will be slower to recover as people overall have less money to spend.

PS. Have you noticed an anomaly which is that GOLD has fallen quite sharply recently when normally one would expect the price of gold to increase? That is because people have been so highly leveraged that they have had to sell other assets (gold one of the easier to sell) to meet margin calls. That kind of says that things are really bad!!!

 

FDR-style measures are needed.

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Posted (edited)
17 hours ago, Eurobonus said:

Sure -at London School of Economics one of my professors recommended that one of our modules should be psychology. Of course I am taking advantage of the panic by shorting right now and sitting on cash waiting for markets to stabilise and buy much more for my money which will improve my yield tremendously over time. So why not? Also at London Business School, the overriding conclusion from analysis of stock markets show that they are not perfect and irrational behaviour is frequent. People are imperfect so if opportunities arise to take advantage of irrational fear, sell  and then buy buy buy more.

A simple question; were any of your business school professors multi-millionaires or at least £1M in assets? Would you confidently follow all the advice of the blind for directions? Greenspan worked as the FED chairman because he failed in Wallstreet. That tells you what you need about academics.

Sure, what you wrote makes sense because trading psychology comes into play greatly. But you need to figure out how to apply certain principles with real money in real-life situations. Otherwise it's just a **** circle.

Actually, my rant is about my immense dissatisfaction with so called experts  with no real life experience and ability. That goes for all professions.

Edited by HPbrand

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@Eurobonus,

Yes, Gold is not behaving like one would expect. This is a signal / indicator to me that things could get worse which is why one must not rush to go long on any assets just yet unless they are strongly trending upwards. 

The UK has a high level of consumer debt. The culture has changed over the past few decades to encourage people to live off debt / loans / finance and credit. When this particular bubble bursts it is going to be carnage. When this credit / debt bubble unwinds there are going to be a lot of casualties.

Remember that Governments around the world came up with the solution to print more money and then throw it as the problems during the financial crisis. If answers were so easy and life was so simple. This will have intended and unintended consequences and when they unravel the last thing investors and traders will be doing is trying to put their money into a piece of shiny yellow metal.

@HPbrand,

Yes I agree. Academics are not necessarily the best investors / traders. They may be knowledgable about economic theory and economic analysis but it not necessarily equate to trading success. 

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2 hours ago, HPbrand said:

A simple question; were any of your business school professors multi-millionaires or at least £1M in assets? Would you confidently follow all the advice of the blind for directions? Greenspan worked as the FED chairman because he failed in Wallstreet. That tells you what you need about academics.

Sure, what you wrote makes sense because trading psychology comes into play greatly. But you need to figure out how to apply certain principles with real money in real-life situations. Otherwise it's just a **** circle.

Actually, my rant is about my immense dissatisfaction with so called experts  with no real life experience and ability. That goes for all professions.

Yes they were. One of the Professors bought a new Rolls Royce every year at London Business School. Also there were numerous others at LBS. Can't remember his name but he was a rocket scientists - brilliant mathematician who did algorithmic trading. I couldn't follow the maths properly as I only studied up to Advanced Calculus II.

I agree with so-called experts spouting rubbish on TV and the Internet. I take my own positions. Hence I decided time to exit myself a month ago and short the market. Didn't listen to anyone re this decision.

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2 hours ago, TrendFollower said:

@Eurobonus,

Yes, Gold is not behaving like one would expect. This is a signal / indicator to me that things could get worse which is why one must not rush to go long on any assets just yet unless they are strongly trending upwards. 

The UK has a high level of consumer debt. The culture has changed over the past few decades to encourage people to live off debt / loans / finance and credit. When this particular bubble bursts it is going to be carnage. When this credit / debt bubble unwinds there are going to be a lot of casualties.

Remember that Governments around the world came up with the solution to print more money and then throw it as the problems during the financial crisis. If answers were so easy and life was so simple. This will have intended and unintended consequences and when they unravel the last thing investors and traders will be doing is trying to put their money into a piece of shiny yellow metal.

@HPbrand,

Yes I agree. Academics are not necessarily the best investors / traders. They may be knowledgable about economic theory and economic analysis but it not necessarily equate to trading success. 

Hey Trendfollower, my biggest fear is that inflation starts trending upwards and interest rates will have to follow. The amount of debt - personal, corporate and countries - will cause absolute havoc with the capitalist system. Hopefully it won't happen in my lifestime but I would definitely not bet against it happening sooner rather than later once this pandemic ends. Think how much money has been printed via quantative easing. Once interest rates start going up, people won't be able to afford  to pay off all the high credit card debts, mortgages etc. SCARY future

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People much cleverer than us are orchestrating this market crash for their own ends.

Never underestimate the ability of the rich and powerful to shape the world for their own ends.

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Posted (edited)
27 minutes ago, Eurobonus said:

Yes they were. One of the Professors bought a new Rolls Royce every year at London Business School. Also there were numerous others at LBS. Can't remember his name but he was a rocket scientists - brilliant mathematician who did algorithmic trading. I couldn't follow the maths properly as I only studied up to Advanced Calculus II.

Fair enough. My point was and still stand as to how much of their wealth were from paycheck income rather than trading income. Reminds me of the majority of traders at investment banks making money off commissions and when they try on their own independently to trade, they fail.

Good for you mate with your success. I find listening to ourselves is always far more valuable than listening to experts muppets.

Edited by HPbrand

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23 minutes ago, dmedin said:

People much cleverer than us are orchestrating this market crash for their own ends.

Never underestimate the ability of the rich and powerful to shape the world for their own ends.

The so called rich and powerful we hear about are just pawns. The real powerbrokers behind the scenes are rarely heard off if ever mentioned.

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4 minutes ago, HPbrand said:

Fair enough. My point was and still stand as to how much of their wealth were from paycheck income rather than trading income. Reminds me of the majority of traders at investment banks making money off commissions and when they try on their own independently to trade, they fail.

Good for you mate with your success. I find listening to ourselves is always far more valuable than listening to experts muppets.

Totally agree with you. There will always be exceptions. By the way, two e-Goldman Sachs traders who set up their own fund had to close their fund because their bets went awry. That kind of tells you something and supports your view. Unless a trader is a proprietary trader, I consider most traders as very overpaid and glorified ORDER TAKERS.

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@TrendFollower

Off topic, just want to say your comments about crypto/Bitcoin has given me a new perspective. Thanks for that.

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Posted (edited)
11 minutes ago, HPbrand said:

Reminds me of the majority of traders at investment banks making money off commissions and when they try on their own independently to trade, they fail.

 

A lot of them got wealthy in the 80s because they had quicker access not just to the market but also to news and information.  Constantly on the phone to each other (and in contact with insiders and VIPs) when the average person waited to get their 'news' from tomorrow's paper.  If you read their stories they are basically all chancers who got lucky.

Edited by dmedin

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2 minutes ago, Eurobonus said:

Totally agree with you. There will always be exceptions. By the way, two e-Goldman Sachs traders who set up their own fund had to close their fund because their bets went awry. That kind of tells you something and supports your view. Unless a trader is a proprietary trader, I consider most traders as very overpaid and glorified ORDER TAKERS.

Heard of Anton Kreil for example? A friend told me about him sometime ago. He is retired from his time working at the big Investment banks. Yet, he is selling courses 🤔🤔.

Makes me wonder...

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Just now, HPbrand said:

Heard of Anton Kreil for example? A friend told me about him sometime ago. He is retired from his time working at the big Investment banks. Yet, he is selling courses 🤔🤔.

Makes me wonder...

 

He oozes 'w@nker'.

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