- COVID-19 is causing global economic disruptions.
- It is 20 times more lethal than the common flu.
- That could mean one million deaths.
- Japan has already closed schools for a month.
- China took draconian measures to limit the spread.
- Looking for a helping hand in the market? Members of Daily Index Beaters get exclusive ideas and guidance to navigate any climate. Get started today »
The Index (NYSEARCA:SPY) has just crashed 11.16% in a week, on enormous volume, indicating the economic fear that the novel coronavirus, COVID-19, will disrupt our consumer driven economy. More important is the possible, tragic loss of life, estimated to be twenty times that of the normal flu, or ~one million deaths among the very vulnerable. Companies like 3M Co. (MMM) are ramping up to war-like production measures to manufacture masks and respirators. This is a public health war on a deadly virus that will kill at a rate of ~2% or 20 times the normal flu rate.
Here is the weekly chart for the SPY showing the enormous volume and the 11.16% drop in price. You can see price slicing through the horizontal lines of price support like a knife cutting through butter. In a market crash, there are no support levels on the way down, until the market decides to stop dropping. As you can see that happened at $286, the low for the week, and the SPY bounced up to close at $296. It is trying to move back to that key support level at $300 that it violated. However, I expect it will keep testing $286 to see if it continues to hold. After all, this is only the first week of this market correction. As the bad news on the Coronavirus continues to come in, like waves constantly breaking on the beach, I expect to see erosion of that $286 line in the sand.
You can see on the Stochastic Signal, Full STO, at the bottom of the chart, has bearishly broken below the 80 line. Look at the previous times this has happened. It will not reverse in the near term, but instead it warns us of lower price levels to come. Retail investors are notorious for selling at the very bottom. Obviously, the market is not there yet. Will they sell at $270 or $260 or $240? Will the SPY do a 100% retracement from the most recent high to the low shown on this chart? I don't know.
I do know that retired investors will not want to risk their retirement nest egg. I also know that this correction doesn't matter to young investors because they can afford to wait for the end of this virus disruption, when the market returns to its old highs next year. Do they have the guts to hold when we see the SPY at $240? It is a question of how much pain a "Buy and Hold" investor can stand? That is the "what if" question they have to ask right now, at the beginning of this Bear market move. It is not going to regain the 11%, that it just lost, anytime soon.
Many pros consider a 10% drop from the stock price high, or market high, to be an automatic signal for their Sell discipline. The market is going down and there is no rush buying until it bottoms, no matter how compelling a fundamental bargain it seems to be. Index selling blindly keeps taking down the fundamental bargains, just like the overpriced, high flyers. When we hit bottom, the bargain hunting buyers, like Warren Buffett, will swoop in and use all the cash they accumulated because the market was overvalued and making new highs.
For another view, you can look at the updated monthly chart that I showed in my article last week. Here it is:
Notice on the far right, the red vertical, Sell signal line that we can now confidently draw. I discuss this in chapter 19 of my book "Successful Stock Signals." I consider a break below the 80 line on this signal at the bottom of the chart to be the start of a multi-month selloff. You can see this has happened in the past on this chart. In other words, it is time to be bearish, not bullish. I will wait for the bottom to bottom fish this market. That bottom is months away after this global pandemic ends. It is only just beginning with the first case just announced in New York City.
There will be good news like the Fed dropping rates. This usually helps in a normal economic recession, but I doubt it will help in this recession. The global economy has the virus and it won't have a bounce until the virus has finished spreading and has killed all the people it is going to kill. The fear will be gone and the world economy will return to normal. My guess is sometime in 2021 which means the SPY might turn up by December. By that time we might even have news of a vaccine that works. Wait for the signals in our weekly and monthly charts to turn up. You will find them here.
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This article was written by
Tom Lloyd holds an MBA in Accounting from St. John's University, where he also taught courses on stock market mechanics. Prior to his time as an educator, Tom served as a Wall Street professional, marketing fundamental, quant, and technical research to professional portfolio managers. He is also the author of the book "Successful Stock Signals for Traders and Portfolio Managers.”Tom leads the investing group Daily Index Beaters where he strives to help his group beat the indexes by sharing a range of reports focused on what smart money and insiders are trading. His Stocks In Demand signal combines both fundamental and technical analysis to help inform both short-term trade and long-term investment ideas. Learn more.
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in SPY over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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