Covid19 Marketview

I'm taking the opportunity to think about the future and while I may not be the most qualified / knowledgeable, I think it's good practice to think about such things and pen them down anyway.

TLDR: I think the worst is still ahead of us, and currently the market is not pricing in the full potential effect of this crisis on the economy.


22 Mar 2020


  • Buy US equities later, prices expected to drop further
  • Buy those with a previous strong run, dominance in space, established, but haven taken a good hit
  • EM like India = Hold, China = Hold
  • Oil exposure ok to hold


Will US lose its dominance?

Considering the possibilities of a world power shift.

China is in a good position because they have had the backdrop of having that economic clout, and now they are recovering faster than US. But the world system is still quite entrenched, so I think it will take more than just this slowdown and who is faster to the recovery race to overthrow US. It will take a really crippling thing to happen to the US which renders their systems unusable and forcing the incumbent ‘clients’ to switch. Similar to how UK lost its dominance in WW2, US fortuitously gained. It was nothing UK could do. But that alone didn’t do it – it required a surge of innovation in the US to propel it forward.

So maybe this crisis is not enough. But it could be the start of something.

Maybe China will gain grounds it would never have the chance to gain until now. Not sure where though. It could further consolidate its power in being the engines of the world economy by looking to replace other links in supply chains that are now closed (because they were in Europe). Availability in a desperate time is valuable. It’s just too difficult to predict how, where, and to what magnitude this will happen.

Back to the question, I don’t think it will lose its dominance in the tech space nor will its stock market be left in the doldrums as the rest of the world accelerates. I do believe that the main indices will recover and make new ATHs in a matter of 5 years. That’s because this virus changes economic demand, and that is a temporary thing. It is not paradigm-altering. Consumer demand remains the same – people will still buy the same things after the crisis and use the same services.

I don’t think it will lose its dominance, though I do think that China will close the gap.


What are the prospects for emerging countries?

A year or a few years back, it was still a good thing to have because everything else in developed markets were expensive – i.e. both stocks and bonds, and we were hungry for yield. We have been since 2016 actually, leading to things like VIX apocalypse.

But now why would we bother with emerging economies when the developed ones are on discount? Looking at India vs US, both are down about 30% and so the relative value goes to US in terms of risk-reward. I doubt India can recover faster than the US.

China looks good given the above reasons, but it has only declined about 12% throughout this crisis, so in comparison to US it’s less of a priority.

I’m just going to keep IN and CN on a hold for now.


What’s the plan for loading up?

I expect this downturn to go further because the curve is just starting for US and probably in the middle or about 35% for Europe. Meaning there’s still some way to go which will really put a dampener on consumer demand and prices should reflect that accordingly.

It seems so far that the way the infection spreads is quite uniform in terms of trend in countries, so it’s not unreasonable to expect the same waves to occur in Europe then US.

Depending on how forward-looking the market is, these could have ALREADY been priced in at this -30% level. But only time will tell as the waves materialize whether the above is true i.e. if it’s not priced in then we’ll see further declines as the infections materialize. If it is already priced in, I expect to see some form of a bottom being carved out. Seeing a bounce in the midst of the wave could be something else (random optimism or some behaviour I really can’t explain) because I’ve yet to see a market so efficiently forward-looking.

Again, many market moves cannot be fully explained – I’ve been stumped quite a few times post-move even with the benefit of hindsight and a plethora of news attempting to explain things i.e. the explanations don’t make sense but more commonly no explanation is given “stocks move higher despite XXX” kind of rubbish headlines.


What to buy in US?

Major indices and tech companies. Generally, companies that have been solidly established and have further room to go but have been knocked back by this. Dominating tech companies are good buys to me, at these levels, as these will not be going away anytime soon. They also have the ability to tide through the storm.

Avoid stocks which are discount on discounts – i.e. prices have been falling anyway. A simple filter is to look for 10-year annualized total return and compare that against 1-mth or 2-mth change in price. With filter of some market cap.


What about oil?

I was a bit too hasty in getting into oil when it collapsed. It took one more hit from 30 to low 20s, which is my lower end of my range i.e. I really did not think it would get this bad.  I had underestimated the contango also – meaning I cannot roll over my positions without significant cost.

Though I think oil will rise back to more normal levels of $30, there is no way to play this as it is already priced that way for the Dec contracts.

Date USO WTI chg chg beta
Jun-14 38 106
Feb-16 8 36 -79% -66% 1.20
Sep-18 16 75 100% 108% 0.92
Mar-20 5 23 -69% -69% 0.99


USO looks decent though in riding spot oil. The contango is built in but at least that’s managed for me.

Funny thing about contango is that market is usually pretty correct – after sharp declines, further months are priced to a premium, and at peaks, they are priced to discount.

This is a reliable signal for the F1-F6 premium too.

What to buy in this recession

Just a quick thought - the last recession saw many financial institutions pulled under. But they were too important to the system, and so many never actually went away. Similarly in this crisis, perhaps we should be looking at the hardest hit sectors and ask: are their share prices reflecting the long term prospects accurately? I will be looking out for 'systemically important' hospitality / travel related companies that have been dragged down too much. It's only a matter of time before consumer demand, air travel, and mass events return. Like banks, they can never go away - they are too important, at least for this era.

Similarly, it would be interesting to see a repeat of 2008 in another sector - i.e. a major hospitality company fails and triggers bankruptcies and selloffs in other related companies and then spread to other less related companies.

Where we are at

The market has finally come down a significant bit, sort of finally pricing in the effects of the virus (we can never know for sure to what extent this is a repricing). Again the market defied expectations for a while - I was wondering why the market was shaking off the virus for the past 2 weeks, but from experience there is always this unquantifiable gap between an investment idea and its translation into profits.

Now that the market has come off its highs, I've been positioned for a short rebound as of last Friday (28 Feb) - this is best done using verticals or diagonals so you have limited downside and not have to pay the elevated premiums.

Also try to go for some vol decay alpha if you wish (e.g. sell puts). Again it's about scale - no need to be afraid of catching a falling knife if you only risk a bit of your capital - sometimes I find it hard to answer people why I have long puts and short puts at the same time (different expiries though) - it's just a dynamic adjustment based on situation.

Update on 07 Mar 2020

The rebound did not look too good, but managed to harvest the higher vol. Seeing as to how the rebound did not play out well, I think there's a good chance a major selloff will ensue instead of a rebound. I'll be positioning myself for that, likely using some cheap OTM bear verticals.

Update 20 Mar pre-open

I'm positioned for a slight rebound using SPY calendar spreads at the 255 area - they are very attractive now due to the high vol in the near leg, and the expected low rate of decay for the far leg. This strategy can be continued for a while using weekly expiries (or even shorter) for as long as VIX is expected to remain elevated.

Update 28 Mar

Though I was a little surprised at the rally, in the larger picture it's quite normal, especially given the speed of the fall. I think the economic damage is yet to be properly appreciated, and so we should be in drawdown phase for quite a while more.

Feb 2020 update

Now that much of my research work is done as part of my job, I don't have much time to devote to research on the sidelines. But here's a recap of what's still ongoing:

The yield curve play is still valid:

Seasonality in indices can still be traded:

Trading the outbreak is not the most convincing for me - I did it mainly to push myself to see what opportunities there are in situations like these, but still have not found anything with high conviction.

I've closed a good bit of my long TRY trades (using options to exit), as it keeps crawling lower (and the carry is diminishing) and so the risk reward is less than what it used to be.

As US markets are near ATH, I've taken the chance to add to long Puts and opportunistically selling Calls.

In FX markets, short term opportunities are still present in short USDCAD.

Commodity futures are still a go, riding on my past research, but not having the time to discover new things.

Opportunities in the Outbreak

While it's certainly no good thing that outbreaks occur time to time, the volatility that it induces in the markets produces opportunities that are quite rare (thankfully).

The first phase is an asymmetric play - to buy the medical / healthcare stocks. They may suffer a bit if the outbreak is less contagious than expected, but they may be lifted by the more general relief going back into the broader stock market.

The thing with exponential growth is that we hardly grasp / estimate it well - we are usually shocked by the numbers when it materializes. Hopefully (and it is my personal view that it won't) materialize as per the trend.

I do expect the trend to buck soon, and when it does, then phase 2 of the plan will be to exit phase 1 and get exposure in the beaten down stocks e.g. airlines, hospitality etc. probably by selling puts, trying to catch a falling knife with the hopes that the signal above is a strong enough and reliable one that we are about to turn the corner.

But above all I do hope for the safety and health of people. It's one of those things you don't mind losing money in a trade for.

Update on 19 Feb

The asymmetric trade in phase 1 did not play out - so that's a small loss, but I went in a bit early on phase 2 and managed to buy some things cheaper. Of note was some stocks which had very high implied vols, and I shorted some puts.