At this moment, the fear of losing money (FOLM) is the prevailing investor sentiment. But I would not be surprised if this sentiment flipped soon to the fear of missing out (FOMO).
Because so many world leaders, science authorities and media outlets around the world have been urging panic, the voices of reason have no voice. The nonstop doom and gloom muffles any hopeful observations or helpful insights.
The stock market is paying a price for this one-sided narrative.
To be sure, the coronavirus from China is terrible and frightening. No one knows how soon it will end, or what the ultimate toll might be. But let’s consider a couple of high-profile guesses.
On one end of the spectrum we find the Centers for Disease Control and Prevention’s “worst-case scenario” estimate that the virus will kill 1.7 million Americans this year. At the other end of the spectrum we find Tesla (NASDAQ:TSLA) CEO Elon Musk, who stated flatly, “My frank opinion remains that the harm from the coronavirus panic far exceeds that of the virus itself.”
Expanding upon that sentiment, Musk also said, “The risk of death from C19 is vastly less than the risk of death from driving your car home … [The evidence] suggests that this [virus] is not within the top 100 health risks in the United States.”
The truth probably lies somewhere between the CDC’s most dire scenario and Musk’s dismissive assessment.
But much of the early data suggest that Musk’s outlook might not be too far off. So, amid the justifiable gloom, there is also some justifiable hope.
The chart below illustrates one of these hopeful reasons.
The Emotion Du Jour
Coronavirus infection rates in China and South Korea are not merely falling; they are plummeting.
Because of how successfully both countries have vanquished the virus — so far — economic activity is reviving. For example:
- Even though Apple (NASDAQ:AAPL) has shuttered most of its retail stores around the world, it has reopened them in China.
- Marriott International (NASDAQ:MAR) has reopened 60 of the 90 hotels in China it had closed one month ago.
- Domestic travel in China is reviving. As a result, about 30% of the nation’s tourist attractions have reopened.
- Many measures of Chinese export activity have returned to pre-crisis levels, according to CargoMetrics.
Additional promising news is flowing from the scientific community. Researchers are working tirelessly to develop vaccines and treatments against the virus.
But none of these positive news stories has been able to halt the stock market selloff. At last count, cascading share prices have erased $26 trillion of market value from the world’s stock markets.
Not surprisingly, fear is the emotion du jour. In fact, as the chart below shows, fear is in a bull market.
Historically, fear — or, bearishness — tends to present great buying opportunities, whereas greed — or, bullishness — tends to present great selling opportunities.
That’s why the CBOE Volatility Index (VIX) sometimes comes in handy.
The VIX tries to put a hard number on the level of fear among stock market investors. To arrive at this number, the VIX tracks the pricing of certain put and call options on the S&P 500.
As volatility increases, option prices rise, which causes the VIX to rise. Conversely, when a rising stock market dampens volatility, option prices fall … and so does the VIX.
A high VIX reading indicates a high level of investor fear; a low reading indicates a low level of fear.
When these readings reach extreme levels, either high or low, the stock market tends to reverse direction … at least for a while.
Extreme high VIX readings tend to coincide with market lows, whereas extreme low readings tend to coincide with important market peaks. The VIX does not possess a perfect record of signaling major market tops and bottoms, but it does have an impressive record.
As the chart above shows, the VIX spiked during the 2008 crash, thereby signaling a major market bottom … and a great buying opportunity. Conversely, the VIX reached an extreme low in 2007, signaling a major market top.
However, its signals are not 100% reliable.
So it is best to think of the VIX readings as indications of relative risk, rather than absolute “buy” or “sell” signals. In other words, whenever the VIX falls toward its all-time lows, it’s one of the most dangerous times to be in the market. Conversely, whenever the VIX spikes toward its all-time highs, it’s one of the most promising times to be in the market.
So where is the VIX today?
Crisis Creates Opportunity
It’s very high.
While it’s receded a bit since then, it topped a reading of 80 on March 19 for the fourth straight day. That’s never happened before. Even during the 2008 crisis, the VIX never traded above 80 more than two days in a row.
The VIX could continue soaring, as the U.S. stock market continues falling, but that would be a low-probability outcome, based on the index’s three-decade history.
Today’s frightened investors will rediscover greed at some point. In fact, if the VIX is to be trusted, that flip-flop could happen soon.
At times like these, it’s helpful to remember that financial markets are cyclical. They cycle through episodes of greed and fear.
Whenever either one of these sentiments reaches an extreme, the stock market typically reverses course.
In other words, investors tend to become extremely bullish at major stock market peaks, just before a selloff begins. Conversely, investors tend to become extremely bearish at major bottoms, just before a new upswing begins.
These patterns have repeated themselves over and over again. That’s why many successful investors pay attention to gauges of investor sentiment … and why so many great investors pushed themselves to invest during the stock market’s darkest hours.
They understood that crisis creates opportunity.
But it is not easy. It is hard.
The kind of success folks like Warren Buffett and Sir John Templeton achieved often began with failure. Their earliest buys into a terrible market usually moved lower first, before moving higher.
With this in mind, I continue to recommend establishing new positions in select stocks, bit by bit. The reward probably won’t be immediate. In fact, it may seem a lot like trudging across Death Valley to find a case full of gold on the other side.
I recently traveled to America’s richest ZIP code to show you one way how to make that hike in this special video presentation.
So grab your canteen and join us.
P.S. Something remarkable happened to me recently while visiting America’s richest ZIP code. (It’s located far from Manhattan, Palm Beach, and Beverly Hills). First, someone smashed our car windows — and stole thousands of dollars’ worth of video equipment.
But the good news is, while there I found what I think could be my next 1,000% winner. (I’ve already found 40 1,000% or higher stock market winners). And now I’m giving away the name and ticker symbol of this company for free here.
Eric Fry is an award-winning stock picker with numerous “10-bagger” calls — in good markets AND bad. How? By finding potent global megatrends … before they take off. And when it comes to bear markets, you’ll want to have his “blueprint” in hand before stocks go south. Eric does not own the aforementioned securities.