The rally in the U.S. stock market, which in large part had been due to a short-squeeze, recently exhausted itself.
Without positive news, the stock market would have sunk.
But stock market bears ran out of luck when a report surfaced Thursday after the close of trading that an antiviral drug, Gilead’s remdesivir, showed promise in treating coronavirus patients.
That’s why investors may consider following the simple principle that I have learned in my over 30 years in the markets: Neither be a bull nor a bear. Over time, the practical way to use this principle has become encapsulated in Arora’s Fifth Law of Investing and Trading: “You need to be neutral and set aside your opinions and biases to see the true message from the markets.”
There was an interesting development on March 23, which turned out to be the stock market low. I wrote at that time: “Many antivirals are being tested, and significantly good news from any one of the major drugs trials will likely cause a 5,000-point rally in the Dow. Other indexes, of course, would rise too.”
This shows the power and benefits for the stock market investor of doing scenario analysis in advance.
The stock market bulls’ declaration of victory on anecdotal data about Gilead’s GILD remdesivir treatment is premature — more later on this. However, the stock market’s reaction shows that a 5,000 Dow point rally is highly probable if a true cure is found. Recall that the Dow topped out at 29,569 in February — only two months ago.
No stock market investor should underestimate the risks from the coronavirus that are ahead. There is a prudent, logical way to navigate the stock market in this volatile coronavirus situation that has proven itself since the Jan. 22 call from The Arora Report of a potential stock market drop due to the deadly virus.
Let’s discuss this.
Three charts
Please click here for an annotated chart of the SPDR Dow Jones Industrial Average ETF DIA which tracks the Dow Jones Industrial Average DJIA.
Please click here for an annotated chart of S&P 500 futures ES00, which is the futures for the S&P 500 Index SPX.
Note the following:
• The first chart is monthly, giving a long-term perspective. This chart should be the starting point of all analysis.
• The second and third charts are 15-minute charts to help investors focus on what will happen in the stock market if a true cure is found.
• The first chart shows that in the absence of more good news, the stock market is primed for a significant pullback.
• The second chart shows the time in after-hours trading when the Gilead news appeared. Initially, the reaction was muted because analysts and the smart money took a critical view and knew there were limitations — a celebration was premature….Read more at MarketWatch.
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