As the Coronavirus Spreads, Investor Fear is Escalating. When Should You Be Afraid?
What an ugly start to the week! U.S. stock markets were all down more than 3% on Monday on the heels of a weekend that brought news of coronavirus making its way to Italy, South Korea and Iran. That makes three straight down days after hitting new all-time highs last Wednesday. It appears a coronavirus market pullback is in full effect.
How bad will it get? Obviously, it could depend on how much more the China-borne disease spreads. But even if it’s contained, it’s possible that after four months of a market going nowhere but up, and after a 28% gain in the S&P 500 in 2019, that investors have been simply looking for a reason to sell stocks. The spreading coronavirus is a convenient—and, indeed, legitimate—excuse for people to sell.
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So what is now a coronavirus market pullback could simply morph into a garden-variety pullback of 5% or 6%; Mike Cintolo, our resident market timing expert, has been warning to look out for a short-term pullback of that kind of depth for weeks. Right now, the S&P 500 has fallen about 4.75% from its February 19 high. The index’s two-month support level is 3,221, which it successfully tested about a month ago, in late January. Yesterday, it closed at 3,225.
The Coronavirus Market Pullback: When to Be Concerned
If the S&P dips below 3,221, which it may do before you even read this on Tuesday, this could be a longer market correction, and could well reach the 6% retreat Mike has warned. Still, a 6% pullback after months of gains shouldn’t be cause for panic. In fact, it would be a golden opportunity to buy stocks you’ve been waiting to get in on at cheaper share prices.
The number in the S&P 500 that I’d be concerned about is 3,093. That’s the index’s three-month low, which it hit on December 3; it hasn’t been below that level since early November. If that support level gets breached, it would mean the S&P has fallen 8.6% from its highs. And it would likely signal that we’re in for a much deeper market crash, perhaps closer to the one we saw in the fourth quarter of 2018.
It’s way too early for that kind of doom-and-gloom prediction. Even though yesterday’s sharp decline was a bit unsettling, it was still just the third straight down day. Prior to that, the S&P was up nine out of 12 days. From a long-term perspective, the trend of the market remains decidedly up, and all of our analysts are recommending buying stocks.
But it’s important to at least be mindful of what’s happening in the short term. And while three days of relatively sharp pullbacks aren’t a huge deal, a few more days could change that narrative—particularly if they’re related to any more coronavirus fears.
The coronavirus itself is very scary, especially now that it’s spread to Europe. But it hasn’t fully infected the market yet. When the market is truly sick, you’ll know it.
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