The new coronavirus is an obvious concern to stock market investors. The media are full of explanations and predictions.
So what should investors be focused on? Let’s explore the issue with the help of a chart.
Please click here for an annotated chart of the Dow Jones Industrial Average ETF DIA which tracks the Dow Jones Industrial Average DJIA.
Note the following:
• The stock market has been very overbought. I wrote on the first report of the virus: “Overbought markets tend to be vulnerable. Sometimes it is an exogenous event that topples stocks. What could be happening currently? Could it be that the deadly virus spreading across China stops the buying frenzy in stocks? The first U.S. case was reported Tuesday.” Please see “How an external event could stunt U.S. stocks.”
• The chart shows that, last week before the stock market drop, The Arora Report gave a signal to raise cash and hedges. Our portfolios are now up to 63% protected.
• The chart shows that The Arora Report also gave a signal to short-sell Nasdaq 100 ETF QQQ prior to the stock market drop. For those who could not short, a signal was given to buy inverse leveraged ETF SQQQ. SQQQ goes up when the stock market goes down.
• The chart shows that the trend line that has been in place since October has now broken. This should be of concern to the momo (momentum) crowd and short-term traders but should not be of concern to long-term investors.
• The chart shows the support zone. If the support zone is not held, that should be a concern to long-term investors.
• The chart shows relative strength index (RSI) divergence. The RSI divergence foretold the present pullback.
• Investors suffer from a recency bias. Please see “This 25-year stock market chart shows investors are under a spell of bullishness.”
• Today’s recency bias is that events similar to coronavirus are short-lived and stocks should be bought on dips.
• To counter recency bias, investors should look at the 1918 Spanish flu in which 30 million to 50 million people died and 500 million people were infected.
• Since 1918, both medical science and communications have dramatically advanced. These should help contain the virus. On the flip side, the world is more interconnected now and there is significantly more travel compared to 1918. Better communications help control the disease, but they can also be instrumental in creating panic.
• Scientists have already determined the genetic code of this particular coronavirus. This should make it possible to make a vaccine. However, a potential vaccine is several months away.
• It is conceivable that one of the existing antiviral drugs including those used against HIV may prove to be effective against this virus.
• Highly applicable here is Arora’s Second Law of Investing and Trading: “Nobody knows with certainty what is going to happen next in the markets.”…Read more at MarketWatch.
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