News is traveling fast about the Corona Virus that originated in Wuhan, China. Two new confirmed cases in the U.S., one in Europe and hundreds in China. As we learn more about this potential pandemic outbreak, we are learning that China did very little to contain this problem from the start. Now, quarantining two cities and trying to control the potential outbreak may become a futile effort.
In most of Asia, the Chinese New Year is already in full swing. Hong Kong, China, Singapore, Malaysia, India and a host of other countries are already starting to celebrate the 7-to-10-day long New Year. Millions of people have already traveled hundreds of thousands of miles to visit family throughout this massive celebration. We are certain that hundreds or thousands have traveled to all parts of the world by now. The potential for exponential growth in the threat from this virus could be just days or weeks away.
Most people are too young to have any knowledge of the 1855 Third Plague Pandemic that originated in China. This outbreak quickly spread to India and Hong Kong and claimed 15 million victims. It lasted until the 1960s when active cases of the Plague dropped below a couple of hundred.
If we consider the broader scope of this issue, we have to take into consideration the results it may have on the broader global economy, commodities and consumer activity as skilled traders.
The world is much bigger than it was in 1855. We have more technology, more capability and faster response capabilities related to this potential pandemic. Yet, we also have a much greater heightened inter-connected global economy, currency, and commodity markets. What happened in China can, and may, result in some crisis events throughout the planet. It is not the same world as it was in 1855. (Source: history.com)
It is far too early to speculate on any future economic outcomes related to this potential outbreak, but it is fairly certain that China, most of Asia, India and potentially Africa could see extensive economic damage related to a contraction in consumer and industrial economic demand as a consequence of this outbreak. Once the Chinese New Year ends, in about 10 to 15+ days, people will return back to their home cities and we’ll begin to understand the total scope of this problem. If the problem continues to be isolated in China, Asia and within that general region, then we may see economic consequences isolated to these regions. If not, then we could see a much bigger and broader global economic consequence setting up.
The 1855 Plague Pandemic lasted for nearly 100 years and wiped out 1.25% of the total global population. This was at a time when air travel was very limited and global economics was a much smaller component of the total global economy. Everything is somewhat isolated at that time. In today’s world, a similar type of event could wipe our 1% to 5% of the total global population before we have any means to attempt to control it.
Bill Gates believes this outbreak could kill more than 30 million people within 6 months (Source: businessinsider.com)
It is time to get real about this and prepare for how the global markets will interpret this potential outbreak.
We’ve been warning that the market was “Rallying To A Peak” recently and believe this outbreak has changed the minds of traders. This could the catalyst that breaks the bullish trend for quite a while. Skilled traders will be trying to get ahead of this rotation in the markets and attempt to deleverage risk. As retail traders, we should be doing the same thing—deleveraging risk, buying metals, trimming open long positions and hedging into inverted ETFs.
Daily ES Chart
This Daily ES chart highlights a very real support level for S&P 500 Futures, near 3050, that also aligns with the longer-term Moving Average. A downside move like this would represent a -10 to -11% downside price reversion and take us back to December 2019 price levels. It could happen very quickly.
Transportation Index Chart
This Transportation Index chart highlights a potential downside price reversion of -11% to -12% – targeting the 9,750 level. We’ve recently authored an article about the weakness in the Transportation Index and how we believe it could be setting up for a downward price move. If a breakdown move like this happens in TRAN, it would suggest a massive contraction in the global economy is taking place.
DOW JONES (YM) Daily Chart
This last YM Chart highlights support near 28,000 which would be an immediate downside target if the Dow Jones Industrials revert lower. And, again, this would put us back to December 2019 price levels. If this 28,000 level is broken, then we start looking at levels closer to 26,000 (roughly -20%).
Concluding Thoughts:
Right now, consider this situation as you are a captain of a ship sailing into a storm. You can either prepare for it and navigate through it to the best of your ability or ignore the warnings and hope for the best. It is far too early to panic at this point, but a certain degree of “preparation” is certainly in order.
We’ll know more in about 7+ days as we learn how far and how wide this problem has actually extended. In the meantime, watch your investments. Protect your assets. Prepare for the storm. Best case, you can always reposition your capital for clearer skies in a few weeks.