World markets have been pummeled overnight, bringing CME index futures to a crashing halt while U.S. equity funds forecast that the S&P 500 and Nasdaq 100 will open nearly 10% lower on Monday morning. Investors who have been told repeatedly not to panic in a downturn aren’t heeding the advice, which is contributing to margin calls and forced liquidation. Unfortunately, catastrophic feedback loops can persist far longer than predicted through charts or spreadsheets.
More sophisticated market players have taken steps to hedge their portfolios through options, inverse funds, and a few commodities. Beginner and intermediate investors don’t have that luxury because poorly timed or placed hedges can blow up into major losses that make things even worse. In addition, put protection is getting prohibitively expensive because market makers don’t want to get caught on the wrong side of the trade.
It’s even more dangerous if you’ve freed up enough cash to look at long-side opportunities because our first inclination is to buy stocks that performed well before the outbreak. Sadly, winners in one market cycle often underperform in the next, requiring fresh research to uncover the highest reward opportunities with the lowest risk. So, bottom line, you may wish to avoid FAANG stocks and their cousins because high-tech is a cyclical industry that needs a healthy business environment to grow.
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