Fluctuation of the stock market in 2020

The year 2020 was marked by the Covid-19 pandemic, which not only affected people’s health and well-being, but also hit the stock market badly, a result of the mandatory confinement. Because the novelty of a pandemic crisis, a first of a kind situation in this era, analysts were unable to predict the future of a business based on regular technical analysis. It was time to rely on profound fundamental analysis predicting the survival or the solvability of a company. In addition to the global economic crisis the pandemic caused due to lack of transport and a significant reduction in production and consumption, another outcome that emerged was the increase in home trading. In this article, I will only talk about the latter, as being one of the hidden reasons behind the stock market fluctuation in the short term.

Home traders are everyone sitting behind their personal computer executing trades. Anyone sitting in their home, behind their personal computer, taking part in trades, qualifies as a “home trader”. This is not new to the market having existed for years. In fact, this is one of the ways that private investors trade, buy, and/or sell stocks. However, the market witnessed a rapid and sudden increase in home traders in 2020, notably because of these three reasons:

The first reason is the confinement. Some people were unable to go to work, others lost their jobs, students were stuck at home with nothing to do, and so on. Hence, some people found themselves having a lot of free time on their hands while others looked for a second source of income.

The second reason is the increase of trading platforms. Just as some businesses were facing difficulties surviving the pandemic, others were booming because of it. We saw the rise of online courses, communication platforms, social platforms and many others, but particularly trading platforms.

These platforms offered an easy and quick way to trade. They were available for everyone and had little to no restrictions. Contrary to the old-fashioned platforms that required bank accounts and certain knowledge of trading, the new platforms were opened for everyone and were made available on mobile phones for quick trades at any time.

The third and final reason is social media scams. Social media scams are not new to the market: whether it is drop shipping from other websites at higher prices, selling e-books to teach the so-called secret of success or social media influencers who scam their followers with fake “before and after” pictures of “poverty and wealth”. These scams have existed long before the pandemic.

When combined, these three reasons create an environment where an inexperienced population believes that trading is easy and fast and has easy access to trading platforms.

All of the above lead to the increase of home traders especially generation Z traders. At first glance, the situation may look harmful. However, these traders lack the fundamental knowledge and technical analysis for trading. Therefore, their operations are based either on last minute news, social media influencers or social trading (Social trading is the ability to copy other traders’ trades). This explains the quick short-term shifts in the market without deep analysis and reasons behind it. They follow the trend, the wave, what they are told to do, without realizing the consequences or the reasons behind it, and will therefore not go very far with it.

Market movers are taking advantage of this situation to influence the market by targeting inexperienced traders and shift the trends. Nevertheless, these trades don’t last because they lack the fundamental analysis.

Personally, I think that after the Covid-19 crisis settles, and people go back to their normal lives, whether working in the office or remotely, studying online or in schools, once the working and studying rhythms go back to normal, we will see a decrease in home traders. Technical analysis will see its way back and the confrontation between the latter and fundamental analysis will start again.

However, a question remains; after the pandemic and fluctuation of the market, is the history of technical analysis still relevant or must it be reinitialized?