As of Monday 16 March 2020 concern around the Corona Virus (or more accurately, COVID-19) has impacted markets around the globe. In the US, a bear market is generally considered to initiate following a 20% drop. Last week we breached that 20% limit in both the S&P 500 and Dow.
While there is certainly a lot of panic in the markets currently, keep in mind the famous saying The time to buy is when there's blood in the streets. Calmer heads will prevail in times like these. Provided you have a well diversified portfolio and use this to time play both defence and offence, implementing correlation based analysis of the market is going to highlight areas of potential.
The current socio economic impact of COVID-19
Before we get into a few ideas of where to look for opportunities in the market, lets sum up the impact that Corona Virus has been having around the globe.
Isolation, schools closing and working from home
Schools have been closing and employees are being advised to work from home. The general theme here is that people are avoiding public spaces which include malls, restaurants, hotels and airports.
Supermarkets are running out of stock
People have been stocking up on non-perishables, hand sanitizer, toilet paper and other basic necessities. This has already gotten to the point that some stores are running out of stock.
Local and international travel in several locations around the globe is being banned or severely limited. In some cases this has been as a result of companies not letting their employees travel for work however in many cases it's the government placing a ban on travel.
When there's fear in the market, there's opportunity
As we already mentioned, calmer heads will prevail. Panicking never helps. This is an opportunity to not only fortify your portfolio but also look for opportunities.
For the last decade the market has been incredibly strong and it's been easy to make money in a market that does nothing but go up. Now that we have fear and volatility in the market, it's important to take a more tactical approach to portfolio construction.
We suggest approaching this in two steps:
- Defence: Make sure your portfolio is diversified both from a fundamental and correlation stand point.
- Offence: Look at themes playing out in the market to find opportunities for gains.
Let's take a closer look at these steps.
Defence: Protect your portfolio
The first step to navigating your way through this volatile market is ensuring you are well diversified and have a structurally strong portfolio. The Portfolio Analyzer will help you do this.
Incorporating correlation into your analysis will ensure your portfolio isn't inadvertently over exposed to similar market drivers. Cluster Analysis helps you see relations between stocks in your portfolio that you may not be aware of. Ensuring you have a well diversified portfolio means knowing where these relations exist so that you're not over exposed.
Offence: Looking for opportunity
Once your portfolio has been fortified by looking at it holistically from both a fundamental and correlation view point, it's time to search the market for opportunity.
Take a closer look at the points we mentioned above regarding the socio economic impact of the Corona Virus. How could these potentially play out in the market? Here are a few ideas worth exploring:
- It's likely we'll see downward pressure on airline, hotel and holiday industry stocks.
- Businesses which focus on home delivery may benefit from an environment where people don't want to go out as much.
- Companies which operate online as apposed to relying soley on physical stores might not feel the impact of less people going out.
- Pharmaceutical companies are certainly worth keeping an eye on as a cure for COVID-19 is developed.
How do we find opportunities in this market?
Once we've taken a look at the themes playing out in the market (such as the ones above), it's time to actually find stocks that look like they may perform well over the coming months.
The Diversify Portfolio Stock Screener allows you to scan the market for opportunities based on correlation. For example, the screener will help you find stocks with a low to negative correlation to airlines. It will also allow you to find stocks with a low correlation to ones that already exist in your portfolio.
Another technique for finding opportunities would be cluster analysis where we look for groups of stocks moving together. Identifying stocks or industries that are moving independently is where opportunity may lie.
Profit with a holistic approach
As we already mentioned, the market has been incredibly strong over recent years however with increased volatility and fear in the market it's more important than ever to diversify your portfolio first and then look for opportunity using a strategic, holistic approach.
Picking individual stocks without any regard to how they move and relate together is a recipe for disaster. It's critical that you focus on your portfolio as a whole to ensure that you first protect yourself from losses. After that, look for opportunities to profit once again by focusing on your portfolio as a whole in terms of diversification and correlation.
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