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…

The market has been obsessed with China’s coronavirus outbreak for weeks now.

Every little development, from another quarantine measure to a new isolated case found outside China, has sent stocks into a flurry of activity.

However, despite the News Media hyping up this outbreak like the end of the world, the data we had showed a different story.

The outbreak seemed mostly contained to its source in China’s central Hubei province. Most cases, and all but three deaths, occurred there. And the vast majority of cases outside of China were Chinese nationals who had recently left Hubei.

This was a Reality Gap where the market was reacting to its own fears, while the data suggested most of those fears were misplaced.

Many market participants were aligned with my analysis and we saw the market continually rebound after negative news pushed markets down temporarily.

This analysis allowed us to see rebounds coming after initial processing of the coronavirus data and handed subscribers to my premium services six 100% gains in the last two weeks.

But new uncertainty about the legitimacy and accuracy of the calming data that was coming out of China has changed all this.

To determine what the Reality Gap is, I always follow the data.

And over the weekend, it became very clear that the “data” China – and even the World Health Organization – has been putting out is in serious question.

And so, I have to updated my short and intermediate-term analysis of the impact of the outbreak on the financial markets.

And we need to adjust how we trade accordingly.

This Virus Is Not a Health Concern for You (If You’re Outside the Epicenter)

That’s not to say that the end of the world is coming.

Let’s be clear: it’s not.

Covid-19, as this strain of coronavirus is now officially called, is still not a threat to your health here in the U.S.

To this day, the largest cluster of cases outside of China is on the cruise ship Diamond Princess, currently docked and under quarantine in Japan. Chinese passengers aboard appear to have infected parts of the crew and other passengers, partly due to woefully inadequate quarantine measures taken by Japanese authorities.

And the number of new infections outside Hubei has been falling for almost two weeks now.

In other words, unless you’re on that cruise ship or are travelling to Hubei, you have almost no chance to contract the virus.

So there’s still no reason to worry about your health.

But Covid-19 has changed my medium-term outlook on the market and economy.

I’m now much more cautious.

Let me show you why…