Should You Get Out of the Market Amid Fears of Virus Spreading?

Dear Reader,

To panic or not to panic…that is the question.

Before I get into that, let me tell you a little story, for context.

Years ago, my wife and I, and some other family members, were flying to Hamilton Island for a wedding. It was cyclone season and a major tropical low had moved in.

After flying for half an hour or so, there was an announcement. There were mechanical difficulties with the plane. It would have to turn back.

This got people sitting up. The chatter picked up. There was nervous shuffling. I was reading a book. And kept on reading.

As we came in to land, in the pouring rain, the plane pulled out and headed back up into the sky. It was a little weird, but nothing to panic about. I kept on reading.

The pilot came around again, went in to land, and pulled out again. From memory, there was something wrong with the landing gear. It’s pretty hard to land a plane when the wheels won’t go down.

By this stage, the panic amongst the passengers had audibly increased. My wife, who hates flying, was definitely worried. But what annoyed her more was that I wasn’t. I kept reading my book, telling her it would be fine.

On the third time into the runway we made it. There were ambulances and fire trucks there to welcome us, hinting at what could have been.

But it was all good. Just like I had ‘predicted’.

Was I right not to panic though? Or was it dumb luck that everything turned out ok?

Who knows?

While not doing it consciously, I was simply playing a game of probability. Putting your investor hat on and thinking about the potential implications of the coronavirus, it’s a timely topic to consider.

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Should you panic?

Should you panic about the potential spread of the virus and get out of the market now?

I would say that is a low probability play. There are plenty of other reasons to get out of the market. But panicking about a virus potentially sweeping the world?

I know. It sounds bad. And if you’re going to panic about something, an out of control virus is a pretty good option.

But doing so would be an emotional response to having incomplete information. After all, that is what a panic is. It’s a fearful response to uncertainty.

So rather than panic, let’s asses the damage so far.

The best way to do this is via the charts. Price charts incorporate all known information (and emotion) in real time. They gave us the best insight into the situation.

Obviously, the biggest impact is in China. There is real fear there about the virus spreading. It will no doubt hit economic activity in the short term.

Take a look at these two important barometers of growth. Firstly, Brent Crude oil…


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Source: Optuma

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After spiking above US$70 a barrel in early January, the price is now around US$59/bbl. This is a region of support though. If prices continue to fall below, say US$57/bbl, then it would indicate that things are getting worse.

Next up is copper. It’s an economic bellwether. Given China consumes so much of it, the copper price gives you a good insight into economic activity there.


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Source: Optuma

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As you can see, the price has plunged in recent weeks. Clearly, copper is telling you that the short-term effect of the virus on China’s economy is potentially significant.

But the broader share market indices are not yet in panic mode. Here’s the global benchmark, the S&P 500.


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Source: Optuma

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January saw a strong run, followed by a sell-off. But as you can see by the position of the moving averages (the red and blue lines) the S&P 500 is still trending strongly higher.

If we’re looking at a global spread of the virus, you’ll see the S&P 500 break down below the lower green trend channel. That’s nowhere near happening right now.

What about the Aussie market?

Here’s a chart of the ASX 200:


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Source: Optuma

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As you can see, in early January the market surged to new highs. It then corrected back toward the breakout point (which often happens). With the moving averages still trending higher, the odds suggest the market will keep moving higher.

I would be much more concerned if the ASX 200 fell back below the December/January lows. Let’s see what happens.

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While we’re doing that, let me make a prediction…

In a few weeks, the coronavirus will cease to be an issue for the markets. Risk on will be back. Stocks will continue moving to new highs. The blow-off top will continue…not even the threat of a global pandemic will stop the bullish momentum.

Then, at some point, the momentum will run out of steam. There will be no more buyers to keep pushing stocks higher. That will be the top…at least as far as 2020 goes.

That will be the time to panic. When no one else is.

Don’t panic now. Plan and prepare for the future.

Regards,


Signature
Greg Canavan,
Editor, The Rum Rebellion

Greg Canavan approaches the investment world with an ‘ignorance is bliss’ philosophy. In a world where all the information is just a click away at all times, Greg believes we ingest too much of it. As a result, we forget how to think for ourselves, and let other people’s thoughts cloud our own. Or worse, we only seek out the voices who are confirming our biases and narrowminded views of the truth. Either situation is not ideal. With regards to investing, this makes us follow the masses rather than our own gut instincts. At The Rum Rebellion, fake news and unethical political persuasion are not in the least bit tolerated. It denounces the heavy amount of government influence which the public accommodates. Greg will help The Rum Rebellion readers block out all the nonsense and encourage personal responsibility…both in the financial and political world.


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