There is only one question right now. Will a second wave of COVID-19 crush the global economy and stocks? I’m here to provide clarity. Today I am going to share what I expect to happen and how to trade it.
In the last two weeks, after a furious rally in April and May, global stocks have been turning lower.
The S&P 500 is down 7% from the recent high. Here is a chart for 2020 – you can see the index turning lower in the last two weeks.
Why are stocks rolling over?
The S&P 500 is falling on news of a second wave of COVID-19 in the US.
For example, Texas is seeing spike in cases right now and its forcing the state to back track on its re opening plan.
Arizona and Florida are also seeing a surge in new cases of COVID-19.
Is it time to panic?
Not even close. I don’t view even a worst-case scenario on COVID-19 as a major threat to stocks.
At the most I could see the S&P 500 falling another 5% to 7% from here.
Here’s why I am confident stocks are going to hold up just fine.
#1 Fool me once, shame on you. Fool me twice, shame on me: When COVID-19 first hit, the world knew nothing about what to expect – and immediately a worst case scenario was priced into stocks. That’s why the S&P 500 fell 35% in four weeks, one of the fastest and sharpest declines ever. Now, more than four months this is a completely different game. We know a heck of a lot about COVID-19 and how it effects the economy and social life. Some industries are hurting. But the grocery stores will stay open. More than 80% of businesses will continue to operate. People will still live mostly the same. Stocks learn, and they learn quickly. COVID-19 is simply no longer the ‘asteroid’ it was supposed to be. And thank goodness for that.
And keep in mind – the media LOVES to talk about how the world is ending. This is the same pattern we have seen 100 times. For example, remember when the US and China entered a ‘trade war’ in 2018 and all the geniuses in the media told us the world was ending?
The global and US economies will collapse!!
Stocks will fall 50%!!
Get out now while you still can!!
Guess what? The US, China trade war barely had an impact on global trade and 2019 was the best year for the stock market in more than a decade. Seems like the ‘experts’ were more than a little bit wrong on that one. And do you think they came back to say – “hey guys, we were totally, 100% wrong on everything we told you. Sorry!’ Of course not. The media quickly moved on to the next “the world is ending’ story to repeat the cycle.The bottom line – take the media’s non stop fear mongering with a huge grain of salt.
#2 Investors want to buy the dip: Stocks took a big tumble in March. But the rebound in the next two months was just as intense. That big rebound is an important message about investors sentiment. Investors are eager to use weakness in the market to buy low.
#3 Central banks have pumped trillions into the global economy in the last few months: Central banks have pumped trillions into the global economy in the last few months and there is no question this flood of cash is going into stocks. Rule #1 on Wall Street? Don’t fight the Fed. The Fed wants stocks up.
#4 The chart tells me stocks are going higher: I see a lot of indicators on the S&P 500 chart that tells me stocks are going higher. The S&P 500 is getting support from both the 50-day moving average (blue line) and 200-day moving average (orange line). I see a key level of support from 290 to 280. I would be surprised if the S&P 500 fell below this level. The relative strength index (RSI), an indicator that measures when stocks are overbought or oversold, is signaling that the S&P 500 isn’t even close to being overbought despite the recent rebound.
How Should we Trade it? Here is My Plan Moving Forward
Moving forward I am expecting to see some volatility in the short run. I would not be surprised to see the S&P 500 fall 5% to 7%.
After some short-term volatility, I expect stocks to stabilize, begin trending higher and move back to the 52-week high.
I will be using weakness and dips in stocks as a chance to buy low and be aggressive. I don’t expect to buy the dead low – but any time the S&P 500 is down 5% to 10% is a good time to be making larger contributions to the market.
I’ll be back next week with another update. Have a great day!