Special Bulletin: January 27, 2020

Is the market catching its own case of the coronavirus?

The coronavirus has captured the attention of Wall Street. Maybe better said, the fear of it has. While the odds of a pandemic are low, the odds for some profit taking and a minor correction are high. As a result of recent market action, our Current Market Outlook has changed to “Uptrend Under Pressure” with a “yellow” light.

While the long-term technical condition of the stock market remains sound, the more immediate signals from our “Core 4” internal indicators are now displaying 1 green, 1 red, and 2 yellow lights. The weighting of that signal combination is solidly yellow. This is the first change in our proprietary signal since going green on October 15th of last year. The “footprints of money” are beginning to indicate it is time to exercise caution.

This is not the first time the market has had to deal with a menacing virus. In fact, it happens more often than you may think. Do you remember the SARS epidemic in 2003? How about the swine flu in 2009? Ebola in 2014? Or Zika in 2015?

The point is that life goes on and the markets eventually recover. The bears will try to remind us of the 1918 flu pandemic that infected an estimated 500 million people around the world. But don’t forget that today scientists can sequence the genes of the virus quickly and work to head off the spread of it earlier. Praise God for that!

Last week in our most recent post we wrote, “That combination (of the Core 4) signals a technical condition that is on the verge of going yellow. Caution is warranted in the near-term as investor sentiment remains at very high levels. A sharp pullback in stocks designed to unnerve traders and weak-handed investors could happen at any time.”

Note: Just three days later it began. The “footprints” are not a subjective opinion. They are the objective “math of the market.” 

We also wrote, “Waiting for a test of the 21 day moving average by the major indexes and leading stocks can lead to new insights. If that test holds, that’s seen as strength! If it fails, then one might expect a deeper selloff to the 50 day mav.

That is where investors find themselves now. Both the Nasdaq and the S&P500 fell sharply and closed under their respective 21 day moving averages today. The test is already happening. The indexes are smack dab in the middle of the 2 lines (21 day mav & 50 day mav) and the battle between the bulls and the bears is ratcheting up.

Exciting theater? For savy IBD* readers, perhaps. But not for investors without a plan. More like a horror movie to them.

As a result of being technically focused on the markets internals every day, and being regular readers of IBD*, we began raising cash for clients last week in our four stock market oriented strategies. The current levels are 34, 34, 38 & 51%. We also initiated a position in a gold stock as a hedge in one of the strategies.

What can an investor do now? Freshen up your “buy the dip” watch list of superior stocks that are extended from bases. Watch the current test of the 21 day moving averages of the major indexes and leading stocks to see if they hold. Expect a rally attempt in the next few days. When it happens, gauge its internals for strength to determine the markets level of resiliency or fatigue. Note: We still do NOT see technical evidence of a severe correction. 

Have a Triumphant day! ® 

* IBD stands for Investor’s Business Daily®. In our opinion, the best source of information in our industry on growth stocks and the markets current trend.