Sentiment, Coronavirus, And The Critical Level I’m Watching…

As many of you know, aside from trading, I’m also a former military intelligence analyst. I’m also a mom.

I took the kids to a basketball game last night. While the kids ran up and down the court doing whatever it is they do, the parents talked about coronavirus and the stock market selloff.

[Related: What The Army Taught Me About Risk Management]

While both could be serious problems, they have another thing in common — they both reflect sentiment. I’ve talked about the importance of market sentiment within the context of successful trading before.

Right now, well, people are clearly nervous.

But what’s interesting is that the data doesn’t confirm this nervousness. As the chart below shows, consumer sentiment remains high.

Source: Federal Reserve

I think the data shows most of us believe we are doing okay. But we know from the news that many others are struggling. Sentiment data shows what we think of our situation. Conversations show what we think of everyone else’s situation.

If you remember, here’s what I said about the coronavirus-related selloff on February 7:

If the coronavirus story becomes more panicked, the stock market will decline. As it declines, it will break support, and that will trigger technical selling. That selloff leaves the market vulnerable to rumors and misinterpretation of news.

In other words, now is a time to consider how bad it can get. We can use that information to decide how defensive to be in our own portfolio.

I don’t think there is reason to panic, but this is a precarious position for the economy. The news is consistently negative, and that creates nervousness. If there is a small disruption due to coronavirus — a few factories laying off workers because of supply chain delays, for example — there could be a panic.

[See Also: Here’s What Happens If Coronavirus Gets Worse]

After the past few days of selling, we are nearing a 10% pullback. That’s officially correction territory. But I don’t mind that, and you shouldn’t either. Corrections are healthy for the market. They remind investors that there are risks in investments. We haven’t had many reminders of that here lately.

I’ll continue to closely monitor the situation, but, for now, we are still in an uptrend.

As I write this, we are nearing correction territory, with the S&P 500 trading around 3,080. If the index closes below 3,050, I will reevaluate the state of the trend. Until then, we remain in a bull market.

For now, panic seems unfounded. Based on what we know right now, coronavirus has a 97.7% survival rate. But there is still a lot more to learn. The key will be whether buyers appear in the next day, as they should.

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As it turns out, this startup owned exclusive global rights to a huge slice of satellite communication frequency channels. It was featured as little more than a footnote in all the data Jimmy and his team combed through, but this hidden asset could be worth up to $10 billion in the future.

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