As I’m writing this on Monday morning, the Nasdaq is set to open almost 3% below Friday’s close. The S&P 500 and Dow are looking to take an only slightly smaller hit, with futures down 2.7% and 2.8%, respectively.
And unless you’ve been hiding under a rock, you know that the reason is the latest news about the coronavirus outbreak, caused by the virus now called Covid-19.
All eyes are now on the virus spreading outside of China, with Italy, South Korea, and Iran unexpectedly turning into infection hotspots over the weekend. There are several scenarios and potential reactions that will greatly affect which way the market moves. More on that in a minute.
Last week, I wrote to you specifically about the high probability that financial markets could take a hit in the near term. The Reality Gap between what was being reported about the virus’ containment and the truth that the underlying data was clearly unreliable made me turn from bullish to cautious. And the fact that supply chains, as well as product sales, were starting to be effected even made me suggest you buy puts on companies like QCOM and QRVO.
I hope you took those recommendations and ran with them as my premium subscribers did, pulling in gains of 100% on Friday and 158% this morning on those two companies.
I’m writing a lot about the coronavirus because it is THE narrative that is impacting the markets rights now – everything else is a distant second.
Covid-19 in Iran has officially infected 66 people, and killed 12. That death rate is many times higher than seen even in China, suggesting inadequate healthcare or a cover-up. Indeed, a local legislator from the Iranian city of Qom claims 50 people have died from Covid-19 there alone.
Already, the virus has spread from Iran to Afghanistan, Bahrain, Kuwait, and Iraq.
But it’s the developed economies like Italy and South Korea that are the main focus for traders.
Italy jumped from three confirmed Covid-19 cases on Friday to 150 on Sunday, and as I’m writing this has announced 209 cases and seven deaths.
Meanwhile, South Korea announced that new infections have quadrupled since Friday, bringing the total to 833.
Unlike China and Iran, Italy and South Korea are wealthy countries with freedom of speech and democracy. So as they start dealing with the Covid-19 outbreak, traders will finally be able to get unadulterated data about the virus.
That will let us know what we’re really dealing with.
Going forward, traders will be looking for three things…
First, responsive and strong action from public health agencies. For example, Italy has imposed a lockdown of about 50,000 people in areas affected by the outbreak, closing schools, events, and shows. Containing the new outbreaks and preventing new infection hotspots will be crucial to keeping markets stable.
Second, markets will anxiously be awaiting word from central banks. If the Fed, or especially the European Central Bank (ECB), announce new injections of liquidity to support the market, traders will react very positively.
Third, traders will be looking at how strongly sovereign governments react or overreact to these new outbreaks. For example, France has announced that it will not be closing its border with Italy (but a train from Italy to Austria was briefly stopped until two passengers could be confirmed as not being infected). Keeping borders open and businesses running as usual will go a long way towards keeping investors from panicking.
Elsewhere, Turkey, Pakistan and Afghanistan have already closed their borders with Iran.
Closing borders within the EU, or between other major economies, would quickly get very messy. The EU is a very tightly integrated economy, and Italy is the third-largest economy in the group (after Germany and France).
If borders start closing down, the repercussions for business and the markets could get severe.
Signs from public health agencies, central banks, and governments will help tell traders how bad this new stage in the Covid-19 outbreak will get.
Until then, continue to trade defensively and buy puts on stocks with strong global sales and supply chains. For Monday, it might be best treated as a day to keep your powder dry, with options premium spiking higher due to uncertainty and volatility. I’ll be scanning for stocks that have the strongest money outflows and inflows and then letting you know where the right places are to put money at work as the week progresses.
This is a Huge Game Changer: Industries all over the planet are using this in droves to make their businesses more efficient. And that means for everyday folks looking to make life-changing money – this is the ultimate way to go…
Great trading and God bless you,
D.R. Barton, Jr.