When things are bad, it often seems like the end of the world; when they’re good, it feels like the party never ends.

There is an old saying, “make hay while the sun shines” which means you should make the most of your opportunities while they are there. This adage has been especially relevant to our financial markets lately, as investors seem to have taken it literally over the summer. Even as markets fell after the global spread of the coronavirus, it became increasingly difficult to resist the urge to find the right dip to buy. At that time, with the flu season out of the way (at least in the Northern Hemisphere), we saw a strong recovery as well as an increase in confidence that the worst was behind us, that a vaccine was just around the corner, and that a full return to growth was slated for 2021 .

Of course, collective sentiment tends to overshoot both upwards and downwards. When things are bad, it often seems like the end of the world; when they’re good, it feels like the party never ends. What we are witnessing now is a moment of collective sobering up. Winter is approaching, COVID-19 cases are on the rise again, more lockdowns appear to be on the way, and investors don’t want to be caught on the wrong side like they were in March.

After the fall in US stocks seen in early September from their all-time highs, the S&P 500 tried to bounce back, stalling at 3422 between September 8 and 10, failing to retest the same level between September 15 and 16, and since period set a new all-time low of around 3230. We’ve seen the Dow Jones Industrial Average and Nasdaq do much the same, with the S&P 500 and Nasdaq recently reaching levels last seen in July and the Dow Jones since early August. On Monday, Sept. 21, the S&P 500 posted four consecutive days of losses for the first time since February. It ended roughly 10% down from the index’s record high set on September 2.

SP 500

As usual, every bounce is met with a great deal of fanfare. The S&P 500 is currently 2.9% above those lows, but there could be further selling in the trade. The attempted rebound we are witnessing is currently being led by tech giants Amazon and Apple. The other usual players in the tech space (Microsoft, Alphabet and Facebook) combined to support the US stock market’s unlikely post-COVID-19 rally and also saw modest gains from the sell-off.

What we are seeing now is a period of coming back to earth and a tentative finding that stocks may have rallied too much over the summer to be overpriced for the risks. The first of the unknowns weighing on investors’ spirits is whether Congress will pass more stimulus before the November election. This was repeated by Fed Chairman Jerome Powell, who publicly called on the government for further fiscal support. With the unemployment benefits and other stimulus measures of the CARES Act recently expired, the big question for everyone is whether a deadlocked Washington will be able to put together another package.

Tensions between the US and China also continue to rise with President Trump pursuing Chinese technology platforms. Citing privacy and national security concerns, the U.S. Department of Commerce recently launched a series of measures that will severely curtail the U.S. activities of Chinese technology companies such as TikTok and WeChat.

In other news, the recent death of Supreme Court Justice Ruth Bader Ginsberg has added tension to an already tense election season as Republicans and Democrats begin a bitter battle over who will replace her.

All of the above is happening amid a surge in coronavirus cases. Apart from the United States, the list of top 15 daily coronavirus cases has been dominated by the developing world (mostly South America, India and Russia) throughout the summer. We’ve recently seen Spain and France re-emerge with an explosion in daily cases, and now the UK is back on the list. On Sunday 20 September, the UK reported 4,422 cases, the highest number since May. With new cases and hospitalizations doubling every week, it is now clear to leaders in the Northern Hemisphere that the second wave is almost upon us, that relaxing measures over the summer and encouraging the public to go out and spend the virus is a foothold right in the moment flu season begins.

The stocks that perform the worst during the irrational exuberance of the rally may be the ones that sell the hardest when the outlook starts to change. Before COVID, Tesla peaked around $193 per share in February. After COVID, it climbed to around $360 in July and catapulted to $500 in late August, much to the amusement of most onlookers.

Tesla

Tesla stock was hit particularly hard during this recent selloff. On September 8, it lost at the open and from $417 at Friday’s close to around $330 at Tuesday’s closeE. That’s a more than 21% drop, the worst one-day performance in the company’s history, wiping more than $80 billion from the company’s valuation. From peak to trough, Tesla corrected more than 34% in September. In fact, the bounce was even more impressive as it rebounded more than 38% from the September 8 low to set a lower high around $463.

Besides technology, what else weighs on Tesla’s much-loved story? Well, for one thing, the company was widely expected to be added to the S&P 500. That didn’t happen because the committee responsible for vetting new entries decided against the addition. Recently, CEO Elon Musk said the company may struggle to ramp up production after an analyst warned that its heavy reliance on aluminum parts could cause problems. Finally, while the stock behaves and is often seen as a kind of bona fide tech stock, the reality is that it’s an automaker that could be hit hard by a second wave of coronavirus infections and lockdowns. This is due to supply chain disruptions, but also shifting priorities among consumers if the global economy is to take another hit. Tesla is definitely a stock to watch because the potential downside is big if the worst happens, as well as the inevitable spikes after every selloff.

Trade with HYCM

About HYCM

HYCM is the global brand name of Henyep Capital Markets (UK) Limited, HYCM (Europe) Ltd, Henyep Capital Markets (DIFC) Ltd and HYCM Ltd, all of which are individual entities within the Henyep Capital Markets Group, a global corporation established in 1977 , operating in Asia, Europe and the Middle East.

Warning for high risk investments: Contracts for Difference (“CFDs”) are complex financial products that are traded on margin. CFD trading involves a high degree of risk. It is possible to lose all your capital. These products may not be suitable for everyone and you should make sure you understand the risks involved. If necessary, seek an independent expert and speculate only with funds you can afford to lose. Please think carefully about whether you are comfortable with such trading, taking into account all relevant circumstances as well as your personal resources. We do not recommend that clients post their entire account balance to meet margin requirements. Clients can minimize their exposure by requesting a leverage limit change. See HYCM’s risk document for more information.

Reference:

https://www.theguardian.com/business/2020/sep/21/us-stock-markets-fall-dow-drops-510-points-coronavirus-fears

https://uk.reuters.com/article/usa-stocks/us-stocks-nasdaq-sp-500-crawl-higher-on-amazon-apple-boost-idUSL3N2GJ2HV

https://www.voanews.com/economy-business/us-stocks-fall-global-markets-swoon

https://www.barrons.com/articles/global-stocks-slump-on-worries-over-infections-gridlock-and-money-laundering-allegations-51600680149

https://www.straitstimes.com/business/companies-markets/us-stocks-advance-cautiously-after-powell-mnuchin-testify

https://www.worldometers.info/coronavirus/

https://www.bbc.com/news/business-54234006

https://www.cnbc.com/2020/09/08/tesla-shares-slump-10percent-in-premarket-trading-after-sp-500-snub.html

Source Link