By Andrey Dashkov, CFA, analyst, Casey Research

Nick Giambruno

Back in March, the world was a completely different place.

Planes were still flying… people were still going to work… lockdowns weren’t yet a reality for hundreds of millions of people. Life seemed normal.

But then, COVID-19 wreaked havoc on our daily lives… and the markets.

2020 will go down in modern history as one of the most disruptive years.

But in that disruption lies opportunity. It’s something I call a “Special Situation.” These situations happen when outside forces distort the market’s normal pricing mechanism.

I’ve talked about Special Situations in the Dispatch before. As a reminder, here are some of the signs I use to identify them:

  • Fundamental disruption. Past patterns will halt, at least temporarily. Growth rates will change (go up or down swiftly), press releases will point at deep fundamental changes, and valuations will break multi-year trading ranges.

  • Lack of information. Put simply, the market shows that it’s confused about how much something is worth. Major indexes or company prices will trade sideways and swing wildly before they settle on a level that reflects all the changes that took place.

  • Volatility. The way the market will “feel” its way toward a fair price will be through a series of wild overshoots and undershoots. This volatility is when you should look out for an opportunity.

  • Bargains. You’ll be able to pick up assets at excellent prices, because the market will stay on the fence about the value of a company or an index.

And these Special Situations can deliver outsized gains… if you know what to look for.

More Uncertainty Ahead… Despite Promising Breakthroughs

In early March, I told you that the coronavirus was a Special Situation.

That was before states across the U.S. enforced mandatory lockdowns… before face masks were required in public… and before the S&P 500 suffered its worst quarterly performance since 2008.

Now, nearly nine months later, not much has changed.

Many folks are still working remote… masks are still required… and several states are considering additional shutdowns.

Recent news of a vaccine has many optimistic that life could soon start returning to normal.

Pfizer and Moderna announced that their vaccine candidates have over 90% efficacy. The FDA will meet to discuss the approval of these vaccines later this month.

And in fact, the UK is going to start distributing the Pfizer vaccine… next week.

But even if the vaccines are approved in the U.S., it still isn’t clear how they’ll be distributed, or when they can be administered widely to the public. It’s likely that nurses and other frontline workers will be a priority.

But even if the vaccines are approved, it still isn’t clear how they’ll be distributed, or when they can be administered widely to the public. It’s likely that nurses and other frontline workers will be a priority.

So even though these breakthroughs are promising… there’s still a lot of uncertainty.

Is the Pandemic Still a Special Situation?

That’s why I believe we’re not out of the woods just yet. And we haven’t seen the end of this Special Situation.

People may have gotten used to the “new normal” of this pandemic. (In fact, that makes now the perfect time to take advantage of this Special Situation.)

But I believe there’s still a lot of volatility ahead…

Just take a look at how our current situation stacks up against the signs:

  • Fundamental disruption. Vaccines or not, the way we work, travel, and socialize will change forever. According to some sources, the airline industry isn’t expected to fully recover until as late as 2024. And it’s estimated almost one-third of us will continue working from home until at least the end of 2021.

  • Lack of information. It’s true that we know more about COVID-19 now than we did nine months ago. And there’s promising vaccines in the works.

    But as far as the market is concerned, there’s still not enough clarity. How will world economies react to the enormous stimuli launched to battle COVID-induced economic crises? How much stimulus will be needed to get things back to normal? Nobody knows for sure.

  • Volatility. 2020 has been a roller coaster for commodities, equities, and bonds alike. The CBOE Volatility Index, or VIX, is still 51% higher than it was in the beginning of the year. And gold, one of the most popular safe havens, is up 21% year-to-date.

  • Bargains. The market is soaring, it seems. The S&P 500 rose by more than 8% over the past month. But if you look closer, you’ll notice that growth is concentrated among select few. And there are whole sectors that have barely recovered since the beginning of the year. That’s where our opportunity lies today…

What You Can Do

In short, the crisis is still here.

If anything, it’s worse than it was in March. On the March 23 market bottom, there were 10,432 new coronavirus cases in the U.S. As of writing, there are nearly 200,000. That’s a 19x increase.

Whole sectors of the stock market that once were invincible are still trading at cheap levels. The energy sector, for example, is down 34% year-to-date. Financials are down 6%.

This is why I suggest you take a look at these beaten-down sectors: financials in particular.

U.S. banks will be among the first industries to benefit from more government stimulus and a post-crisis recovery.

The SPDR Bank ETF (KBE) is a good choice for value-minded investors. It’s down 13% year-to-date, so its price is attractive… and it pays a handsome dividend. As always, be sure to position size appropriately.

In my next Dispatch, due to hit your inbox next week, I’ll review the “coronavirus calls” I made earlier this year to profit off this Special Situation.

Some of them delivered outstanding returns… And should continue to perform well as this crisis unfolds…

Good investing,

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Andrey Dashkov, CFA
Analyst, Casey Research