The market’s rapid 25% rebound might have left you thinking that this stock market crash is over. It isn’t.
Admittedly, I can’t be absolutely certain the market won’t continue rising in a straight line. But there are several key indicators that make me think we will still face some nasty down days over the coming months
In this piece I’ll look at two reasons to be cautious — and I’ll explain what I’m doing with my share portfolio right now.
This volatility signal is flying high
When market conditions are volatile, the risk of sudden movements is higher than usual. That’s true at the moment. We can measure this with volatility indices, such as the US VIX index.
As I write, VIX is trading at about 33. The last time the volatility index was this high was in 2011, when it looked like the euro could collapse.
Admittedly, VIX is down from the much higher levels we saw in March and early April. However, for much of the last five years, VIX has been trading under 15.
Market conditions are definitely not back to normal yet.
Warren Buffett isn’t buying
During the 2008/09 stock market crash, we saw US billionaire Warren Buffett wade into the markets. Mr Buffett used some of his legendary cash pile to take large stakes in distressed businesses such as banks, on which he later made big profits.
This time around, Mr Buffett has been pretty quiet. He’s ditched his airline stocks — it’s too soon to know how smart that was — but as far as we know, he hasn’t bought much.
Given that Mr Buffett’s company Berkshire Hathaway had $137bn of cash on hand at the end of March, I think it’s fair to say that he’d be buying if he could find decent opportunities. That hasn’t happened, at least not yet.
What I’m doing in this stock market crash
Over the long term, I’m confident the stock market will rise. But over shorter periods, I have no idea. So it’s not always easy to know when the best time is to buy.
However, I don’t want to sit on cash forever, missing market gains while I wait for the perfect moment. So what I do is to buy regularly, on a schedule. Sometimes my timing is better than others, but overall it evens out.
The second thing I do is to buy shares in companies I’m confident can survive difficult periods and return to profitable growth. That means businesses with proven business models, which don’t have too much debt. I don’t invest in speculative, unprofitable businesses.
My strategy allows me to safely ignore short-term market dips, as I always expect my stocks to deliver earnings and dividend growth over the long term.
Will the market crash again?
For what it’s worth, I think the worst of the crash is over. I don’t expect a repeat of March’s sub-5,000 low.
But I do think we’ll probably see the FTSE 100 drop below 6,000 at some point, as we start to see the real impact of lockdown on company finances.
Ultimately, I believe the world will keep turning. To make money from stocks, I think you need to stay on board and be prepared for a bumpy ride.
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Roland Head has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Berkshire Hathaway (B shares) and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares) and short January 2021 $200 puts on Berkshire Hathaway (B shares). Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.