Market Sell-Off Was “Overreaction,” Says Avatrade

Market Sell-Off Was “Overreaction,” Says Avatrade

Yesterday, the US market saw its worse sell-off in two years due to fears that emerged about the Coronavirus spreading. However, Avatrade have stated that traders should not be too concerned about these numbers.

Although Avatrade has been somewhat pessimistic about the role of the Coronavirus and what it might do the global economy in the past, they changed their tune when discussing the huge market downturn in the US market yesterday. In what was a massive hit on the market, the Dow Jones dropped 1000 points or 3.56%, the S&P500 fell 3.3.5%, and the NASDAQ was the worst hit with the index dropping by close to 3.71%.

However, this was perceived by a member of the Avatrade team as simply “market participants overreacting” to the news that the virus has spread and that while this market turndown was expected, it should not have dropped by such a significant figure. Instead, they explained that they did “not see any significant reason as to why the Dow Jones should plunge over 1000 points, as there is nothing new about the on-going virus. The fact is, that the way investors were acting yesterday made the situation look like a pandemic” in one of their latest blog posts.

In fact, on the contrary, the platform has asked whether it could be a market opportunity for those looking to counteract the sell-off and benefit from it. Although, it might not be as clear cut as this and they have drawn attention to a few important market signifiers that could better explain whether for investors it is indeed an opportunity and if so, which areas of the market they should have a look at investing into. The two areas of which to look into in order to answer this is volatility index and gold.

This two “risk-off” instruments saw impressive jumps yesterday while the rest of the US market saw its drop. The VIX saw a 46% increase means that it crossed above the 25 mark for the first time since nearly 14 months ago. Meanwhile, European equity volatility also surged with Euro Stoxx 50 seeing an increase by as much as 47% irrespective of the current volatile European market that has looked in dire straits over the last couple of weeks.

As per Avatrade, “the fact is, nothing significant occurred yesterday which caused both of these indices to surge the way that they did”. They note that only when the VIX index hit the 35-mark, last seen in December and February 2018, and this is considered to be a “fear number” and that it reached this 25 mark back in August but then quickly recovered. Gold, on the other hand, saw no strong price action and the closing price was essentially the same as it began. While, today, “we are not seeing any upward move. I think it is likely for the gold price to retrace a little or consolidate before the upward momentum takes off again.”

All of this combined means that it does indeed look like investors overreacted yesterday and that there is no need to be concerned about the situation just yet. This also means that in regard to whether there is an opportunity to invest the answer is not yet. With the platform stating, S&P500 index crosses back above the 50-day moving average on a daily time frame, then this could be the opportunity that investors have been waiting for. However, if the price fails to cross above the 50-day SMA, then it is likely for the price to touch the 100-day SMA.”

Therefore, keep your eye on the market and ear to the ground, for now, at least.

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