There were several bottom extension signals in equity indices yesterday. Here is a signal in the Eurostoxx and the beginnings of one in the S&P today. Please note that the S&P signal is generated only using data from the European morning – there is no input yet from the US session, so things may change:
There were also signals in the US Oil and Gas, energy, Aerospace & Defence, Telecoms and Pharma sector indices. Here is a selection:
None of this means that we advise buying to go long here as the drop is so steep that being early by a day or so could be very expensive – the S&P signal is also generated using intra-day data, which we do not usually publish as circumstances can change so much in the remainder of the session.
We do however advise taking some protection on short positions – cover, place a trailing stop, write some puts or take some other protective action. It is likely that the worry that is causing this market sell-off is over done but there are some things to consider:
- A vaccine for Covid 19 will be developed but probably not for six months to a year. The global distribution of it will take a massive effort even after the treatment is considered safe enough for human use. Many more people will be infected by then.
- The most dangerous situation will be if/when the virus takes hold in any sub-Saharan or North African countries/India/Pakistan/Afghanistan/Indonesia/Philippines and so on. These countries have poorly developed public health programs, densely populated cities and a culture of discretion and secrecy. This will lead to rapid further spread and will create a reservoir of infection that will endure into in the future. Quarantine in G7 countries will only pause that longer-term threat.
On the other hand:
- Epidemics tend to be self-limiting, especially those caused by viruses which evolve quickly and the virus will usually not arrive at the exact balance of being not too lethal (so hosts survive to spread it) incubating for the most dangerous periods (fairly long, with contagion before symptoms) and transmittability, for maximum contagion. Covid 19 seems to be scoring well on all these (although lethality is only about 2%) but the virus will not stay in this ‘sweet spot’ for long. It could of course evolve to become even more dangerous…
- Rates of transmission seem to have flattened off, for now. This may indicate that the virus is already less transmittable.
- Commerce will find a way. Factory production will recover and new routes for supply chains will quickly develop.
There seems no reason to think that this epidemic will become a pandemic and even less reason to think that it will be the death of international trade, which has withstood the depredations of president|Trump, next to which a virus is trivial.
All signals courtesy of software supplied by our friends at Parallax Financial Research www.pfr.com
