This Signal Will Tell Us To Start Playing Defense
Coronavirus is still in the news. Unfortunately, we still don’t really know much. Throughout the week, news sites have updated the number of cases and deaths. But those are just raw numbers. And so far, more people in the U.S. have gotten the flu.
The pictures in the articles are, quite frankly, scary. But they are intended to be. We’re seeing medical teams wearing protective gear and quarantines enforced by authorities around the world.
If I can be frank, it’s the quarantines that have me the most concerned from a stock market perspective. I’m going to acknowledge that the situation is a humanitarian crisis and then acknowledge that you don’t want my thoughts on healthcare policy or the tragedies that are part of life. So, to the stock market, starting in China.
(See Also: Here’s Why The Coronavirus Story Matters)
The State Of China’s Market
Chinese stocks finally opened on Monday after being closed for the previously scheduled Chinese New Year week-long holiday. Prices plunged on the open and are now more than 12% below their recent high as I write this.
Chinese authorities did use the week-long break to prop up the market as much as possible. Officials lowered short-term interest rates and added funds to the money market, steps similar to those the Federal Reserve takes in a crisis.
But short-term support isn’t keeping factories operating. That’s the biggest economic impact right now, and that is now expected to reduce China’s GDP by 0.9% in the first quarter. This is down from an estimate of 6% growth published before the virus struck.
Growth should recover somewhat in the rest of the year. Growth for the full year is now projected to be about 5.5%, down from earlier forecasts of 5.9%.
The longer the pandemic fears remain, the worse the economic hit will ultimately be. That could lead to a bear market in the United States if the coronavirus is still a concern at the end of this quarter.
The State Of The U.S. Market
I know U.S. stocks are rallying, but the current pattern is one seen at previous bull market tops.
In the past — including tops in 2007, 1999 and 1987 — the new high is followed by a decline lasting about four weeks. Then a rally ensues, which usually stops below the previous high. Taking out the bottom of the initial decline is the “sell” signal.
For now, a close below 3,215 in the S&P 500 would be a signal to become very defensive. Even then, nothing about my put-selling strategy will change. We will continue to follow my rules that have identified winning trades in every market environment, thanks to my award-winning indicator.
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