2020 COVID Stock Market Crash: Panic Meets Opportunity

2020 COVID Stock Market Crash: A Storm of Panic and a Surge of Opportunity

Updated June 21, 2024

Introduction:

“In the annals of financial history, the 2020 COVID Stock Market Crash is a testament to human psychology’s profound impact on markets. This essay delves into the storm of panic that swept through Wall Street and the surge of opportunity that followed, using the lens of behavioural psychology, contrarian thinking, and unconventional wisdom. By examining the events of 2020, we’ll uncover timeless lessons about market dynamics, human nature, and the art of contrarian investing. Prepare to challenge your assumptions and explore the hidden patterns that govern financial markets in times of crisis.”

High V-Readings Signal Major Market Moves: Time to Back Up the Truck

The V-readings are currently at exceptionally high levels, which is unsurprising given the extreme shifts observed in market sentiment. Higher V-readings indicate increased volatility. However, when the overall trend is positive (as is presently the case), more significant upward movements are typically seen once the markets stabilize. In other words, the markets advance by two to three steps after stabilising and then retreat by one step.

Therefore, it should not be surprising to witness 1000-point swings in the Dow, as they are likely to occur regularly. A couple of weeks ago, the Dow surged by over 3600 points in less than three days. There is a strong possibility that the Dow could still undergo a 3000-point swing in a single day.

The “mother of all buy signals“has been triggered, so its time to back the truck up. We will cover insider buying activity shortly; needless to say, they are pretty bullish on the long-term prospects of this market.

We are approaching a critical threshold in terms of extreme market behaviour. It is important to note that before the pandemic, the gauge never even reached the end of the zone associated with heightened anxiety. Therefore, the current situation is unprecedented. With such a significant surge in the anxiety gauge, a drop in neutral readings to just 10% would be sufficient to trigger a “father of all buy signals.” However, this would only be valid if our technical indicators indicate highly oversold conditions and the Trend indicator remains positive (indicating a bullish trend).

Three Weeks We noted that Insiders were backing the Truck Up.

Those with privileged information have taken advantage of this significant market decline to acquire shares. One method of gauging the intensity of their purchasing is by examining the sell-to-buy ratio. A reading of 2.00 is considered normal, while anything below 0.90 is considered exceptionally optimistic. The ratio is astonishingly low, 0.35, indicating that these individuals are aggressively buying shares.

So, what are the current readings? Based on substantial trading activity, Vickers’ standard NYSE/ASE One-Week Sell/Buy Ratio is 0.33, and the overall one-week reading is 0.35. Insiders aren’t simply buying shares; they are voraciously acquiring them. This behaviour mirrors what occurred in late December 2018, following the stock market crash on Christmas Eve, in early 2016 during a market correction, and in late 2008/early 2009 amidst the depths of the Great Recession. Those periods presented outstanding opportunities to purchase stocks. Insiders appear to be suggesting that today offers a similar prospect. . https://yhoo.it/2TV0cE2

Insider Buys: These Chaps are Still Buying Hand Over Fist

Corporate executives and officers have been adding shares of their firms over the past few weeks at breakneck speed, so much so that they’re more bullish than they’ve been at most other points in the past decade, according to Sundial Capital Research.

During this period, which admittedly took place during a significant bull market, instances of peak insider buying have proven to be a positive indicator for stocks. The S&P 500 experienced a median increase of 20% over the following year. From 1997, the benchmark recorded a gain of 12.6% in the 12 months following robust insider purchases. Jason Goepfert, the president of Sundial, a research firm based in Blaine, Minnesota, noted sufficient evidence to view insider positions as a positive signal. However, it should not be assumed to be a strong buy signal, as trends have been less favourable in the past decade.” https://yhoo.it/2wmO3P6

The trend is clear, and the insiders know this; otherwise, they would not purchase shares aggressively.

The Herd Mentality Mirage: Unmasking Cognitive Biases in Market Panics

In the throes of the 2020 COVID Stock Market Crash, we witnessed a perfect storm of cognitive biases that drove market behaviour to extremes. The herd mentality, a psychological phenomenon where individuals align their thoughts and actions with the group, was particularly evident during this period of intense market volatility.

As fear gripped the markets, investors succumbed to several cognitive biases:

1. Availability Bias: The constant stream of negative news about COVID-19 made worst-case scenarios seem more probable, leading to panic selling.

2. Loss Aversion: The fear of potential losses outweighed the prospect of future gains, causing many investors to exit the market at its lowest point.

3. Recency Bias: The rapid market decline led investors to believe that the downward trend would continue indefinitely, ignoring historical patterns of market recovery.

Contrarian investors who recognized these biases could capitalize on the market’s overreaction. By understanding the psychological underpinnings of market panics, savvy investors can position themselves to profit when others are gripped by fear.

Case Study: Warren Buffett’s Apple Investment
During the market panic, Warren Buffett’s Berkshire Hathaway increased its stake in Apple, demonstrating a contrarian approach that capitalized on the market’s cognitive biases. This move proved highly profitable as Apple’s stock rebounded strongly in the following months.

Panic Sell-offs Culminate With Buying Opportunities.

Once the panic subsides, it is anticipated that a frenzy unlike anything witnessed before will ensue. Insider buying activity suggests that the markets will experience significant upward trends in the upcoming months. The combination of zero interest rates bolsters this projection, the injection of trillions of dollars into the stock market by the Federal Reserve, and additional billion-dollar stimulus packages aimed at stimulating the economy. Consequently, the market is expected to surge to unprecedented levels by today’s standards. Furthermore, zero interest rates will compel many individuals with fixed incomes to engage in speculative investments.

The initial phase of hitting the bottom is always challenging, as it aims to eliminate those with weak resolve. However, those individuals with the foresight to consider the larger perspective will reap the most significant benefits in the coming years.

The Volatility Paradox: Harnessing Market Chaos for Strategic Gains

The 2020 COVID Stock Market Crash presented a paradox: while extreme volatility signalled danger to many, it also created unprecedented opportunities for strategic investors. This phenomenon, called the “Volatility Paradox,” demonstrates how periods of market chaos can be leveraged for significant gains.

Critical Strategies for Harnessing Volatility:

1. Volatility-Based Asset Allocation: During the crash, investors who dynamically adjusted their asset allocation based on volatility indicators were able to minimize losses and position themselves for recovery.

2. Options Strategies: The VIX (Volatility Index) spike during the crash created opportunities for options traders to implement strategies like volatility arbitrage and long straddles.

3. Sector Rotation: The pandemic-induced volatility affected different sectors unevenly, allowing astute investors to rotate into industries poised for growth in the new economic landscape.

Case Study: Volatility ETFs
Investors who correctly timed the market volatility using ETFs like the ProShares Ultra VIX Short-Term Futures ETF (UVXY) saw returns of over 500% during the market panic. However, these gains were short-lived, highlighting the importance of precise timing and risk management when trading volatility.

While frightening, the Volatility Paradox teaches us that market chaos can be a powerful tool for strategic investors who understand how to harness it. Investors can turn market turmoil into opportunity by developing strategies that capitalize on volatility rather than flee from it.

Conclusion:

The 2020 COVID Stock Market Crash is a powerful reminder of the intricate interplay between market dynamics, human psychology, and strategic investing. As we’ve explored, the storm of panic that swept through Wall Street was quickly followed by a surge of opportunity, particularly evident in the aggressive insider buying activity.

Studies have shown that insider trading activity can be a reliable indicator of future stock performance. In a 2013 study, researchers found that stocks with insider buying outperformed the market by an average of 7.7% over the next year. On the other hand, stocks with insider selling underperformed by 4.4%.

Key takeaways from this analysis include:

1. High V-readings and extreme market behaviour often signal significant upcoming moves, presenting opportunities for savvy investors.

2. Insider buying activity, as demonstrated by the exceptionally low sell-to-buy ratios, can strongly indicate future market performance.

3. Cognitive biases, such as herd mentality, availability bias, and loss aversion, play crucial roles in market panics and can be exploited by contrarian thinkers.

4. The Volatility Paradox shows how periods of market chaos can be leveraged for strategic gains through techniques like volatility-based asset allocation and options strategies.

5. Following insider trading activity can provide valuable insights and potentially lead to outperforming the market, as evidenced by studies showing significant outperformance of stocks with insider buying.

As we move forward, it’s clear that understanding these complex dynamics is crucial for investors looking to navigate future market turbulence. By combining insights from behavioural psychology, contrarian thinking, and careful analysis of insider activity, investors can position themselves to weather financial storms and thrive in them.

The 2020 crash has reinforced the timeless lesson that panic sell-offs often culminate in extraordinary buying opportunities. For those with the foresight to look beyond short-term volatility and leverage the insights provided by insider activity, the potential for significant long-term gains remains substantial.

Research

Research indicates that tracking insider trading can be a valuable strategy for investors:

“Insider Trading and Stock Market Efficiency” by H. Nejat Seyhun: This paper finds insider trading to be a reliable indicator of future stock performance, with stocks showing insider buying outperforming the market. [Link](https://www.nber.org/system/files/working_papers/w3541/w3541.pdf)

“The Investment Value of Insider Trading” by Alan D. Jagolinzer: This study shows that insider buying is a stronger signal than insider selling, suggesting investors should monitor insider trading to generate alpha. [Link](https://www.jstor.org/stable/23312611)

“Insider Trading and Future Return: An Analysis of International Markets” by Sanjay Sehgal and Abhijeet Chandra: The paper finds that insider buying predicts future returns in international markets, recommending global market investors follow insider trading. [Link](https://www.researchgate.net/publication/280909375_Insider_Trading_and_Future_Returns_An_Analysis_of_International_Markets)

“The Insider Trading Debate” by The Wall Street Journal: This article covers the ethics and legality of insider trading, noting its potential as a signal for investors and as a source of unfair advantage. [Link](https://www.wsj.com/articles/the-insider-trading-debate-1428602583)