Breakdown of the latest developments on the global exchanges
Jun 12, 2020, 10:37 AM GMT

Yesterday's Stock Market Rout Highlights the Fragility of the Otherwise Bullish Market

The New York Stock Exchange (NYSE)

The S&P 500 tumbled by nearly 6 per cent during yesterday's trading session on investors' fears regarding a possible second wave of the coronavirus pandemic. Wall Street's concerns were triggered as the number of cases in the US continues to rise amidst the government's gradual easing of containment restrictions.

The drop marked the single most significant daily plunge since the 12 per cent wipe-out that was recorded on the 16th of March, shortly before the market reached a dip from which sprang up the current bullish run.

The fact that a daily stock market rout of such a scale occurred as a consequence of renewed fears over the healthcare crisis is quite telling of the intrinsic stability of the still prevailing bullish run.

After all, the drop was not triggered by a piece of unexpected and sudden news, but by something that the market should have expected.

Experts from the World Health Organisation (WHO) have been cautioning against the possibility of a second and even third wave since the early days of the pandemic, which should have negated the 'shock value' of the recent developments.

Evidence to the contrary is demonstrative of the speculative nature of the broader bullish run, which is not inspired by sound economic factors, but rather by emotional decision-making on the part of smaller-scale investors and retail traders.

Essentially, the bullish run is starting to look increasingly like a typical bubble, which is characterised by the swift execution of massive trading volumes. In contrast, healthy bullish markets are supported by value investing. Longer-term investors typically do not get in and out of the market so frequently.

In light of these new developments on the stock market, S&P's prevailingly bullish sentiment can no longer be so definitively confirmed. The sudden surge of volatility from yesterday challenges these previous assertions.

The latter is manifested by VIX's more than 30 per cent jump from yesterday, as substantial levels of adverse volatility swept across the stock market. The VIX index measures those levels that are currently affecting the S&P 500.

Two conclusions can be drawn from these recent developments. First of all, S&P's clear-cut bullish run is about to become much more sporadic, which opens up the possibility for swing trading.

Secondly, the fact that the Nasdaq has once again outperformed the S&P at a time when uncertainty is on the rise means that tech stocks are still the go-to securities for investors wanting to hedge their risks from the likelihood of a new downturn.

US Stocks vs Volatility Comparison Chart