Wall Street is infected by coronavirus disease, Covid-19
Last week’s reversals (Covid-19 spikes and stock market dives) made the descriptor, “bad,” popular again. However, each of those “bad” issues produced strong contrarian reasons to be optimistic and bullish.
Coronavirus / Covid-19 – Rising infections produce positive actions
To understand why today’s news is good, we need to remember the conditions surrounding the stock market’s coronavirus selloff. In March, states independently closed non-essential businesses, institutions and activities in order to slow the infection spread and gain time to get better prepared and to study the disease. Three months later, with improved understanding and better preparation, a reopening is occurring within each state, again independently.
Now to what’s happening. The variety of state reopenings has produced differing results. The ones most talked about were where the Covid-19 infection rate rose rapidly.
However, examining the range of results is the correct approach, and the view is not a surprise. Instead, the differing results confirmed the three major expectations:
First – That reopening would increase the number of coronavirus cases, simply because more people will be out and about. – Check
Second – That reopening on a staggered schedule with advance planning, safety directives and daily monitoring (including trigger points and corrective actions) will mitigate the risk of a runaway increase. This approach could be sped up and slowed down, but it should avoid the need of having to reverse course. Moreover, as activities continue to open, a moderate increase in infections will be seen as understandable and reasonable – that is, as a beneficial tradeoff, with the added benefit of risk being somewhat under an individual’s control. That view will allow the reopening plan to continue progressing. – Check
Third – (This is the flipside of the second expectation and the source of the “bad” results.) Reopening speedily without comprehensive planning, directives and monitoring could unleash a rapidly rising infection rate. In that case, the solution for regaining control is to stop the reopenings and, if results are bad enough, having to reclose problem areas. – Check
So, all three expectations became fully evident last week
Why is that the good news? Because the states that experienced the negative, third expectation are already taking the steps proven effective by the states that are confirming the positive, second expectation. Importantly, that includes adopting the politically-charged but proven key safety precautions of social distancing and face masks.
While this means those states are suffering a setback, it will be temporary with positive results. And that, in turn, will mean major companies and institutions, along with smaller and local businesses, will be able to open/reopen with confidence. (For example, Apple AAPL will reopen those 32 stores that they just reclosed in Covid-19 hot spots.)
The stock market drop produces buying opportunity
After its rebound and partial recovery, the market has been at work, building a foundation. After setting a recovery high on June 8, the market pulled back. It now offers a good buying opportunity, based on five technical factors. Friday’s (June 26) close of 25,016 put the DJIA…
- At bottom of original, coronavirus selloff and volatile stabilization
- At bottom of new foundation-building area
- At 50-day moving average barrier
- Near -10% correction barrier
- At even-number 25,000 level
The Dow Jones Industrial Average daily graph year-to-date 2020
John Tobey (StockCharts.com)
An important point to remember is that the original selloff three months ago was in a time of maximum uncertainties about everything having to do with the disease and the shutdown’s consequences. Since then, many uncertainties have diminished, and now we are leaving the shutdown status. Beyond that knowledge and some company results so far, key stock market fundamental forecasts have sizeable uncertainty. In times like this, investors are more willing to make judgments based on stock price action. Therefore, those five technical factors are useful guides.
Additionally, as I explained in “Stock Market Outlook: 3 Volatile Weeks, Then Pure Excitement,” we are in the volatile period of quarter end and quarter beginning as we approach the earnings season – all in short order. While no one expects happy news in the coming earnings reports, the view is that we likely will get low point reports upon which company strategies will be built. In other words, once the weak second quarter earnings reports are given and any price adjustments are made, all eyes will turn to two forward views: Recovery potential over the remaining six months of 2020 and growth potential for 2021.
Bottom line: Rising infections and falling stocks are bullish
The reopening variability, particularly the negative issues, have a sound basis and were expected. As a result, proper corrective measures will be made, putting most (all?) states on track for reopening success, with most organizations taking safety measures and most people acting prudently. Yes, there will be more infections, but they will be viewed as an acceptable and necessary trade off for moving life back to a form of normality.
At the same time, the latest stock market selloff looks like a knee-jerk reaction to re-closing actions and all that “bad” discussion. However, this is no longer a debate between opening or not. It is about opening properly so that infection rates don’t climb uncontrollably fast. Therefore, look ahead in thinking about the stock market and its underlying companies. Expect improvement from this point forward, and that means taking advantage of opportunities like the current stock market selloff.