These Five Signs Will Show When Stock Markets Are About to Bottom Out

Last week gave hope that stock markets had found a bottom, with a three-day rally that brought the Dow up over 20% from Monday's close through the end of Thursday's session.

The Dow rallied more than 6% on Thursday to post its biggest three-day gain since 1931.

After all of the doom and gloom over the last few weeks caused by the coronavirus outbreak, people are desperate for any good news, and investors are eager to find a floor to the market.

But it's that bias that may be causing a Reality Gap between what people are hoping for in the market and what is actually happening.

In fact, stocks fell sharply on Friday, giving back some of the previous three days' gains on news that the United States has now become the country with the most confirmed coronavirus cases.

So the question remains: Are we at the bottom? And what will tell us that the market is making an investable bottom - one that will hold for more than a week or two?

For that, we know that the exponential spread of the virus itself is the primary problem. But with an estimated 1 billion people worldwide now under some sort of advisory to stay indoors and limit social interaction, fear and anxiety is taking a huge psychological toll on people.

The economic consequences of it all are clear to see. At its lowest point, the Dow was down 37% from its peak.

But have no doubt. We will get through this.

And on that last point especially, there are five clear signs I'm looking for to identify when the markets will bottom out...

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Watch for These Five Things to Know When to Buy the Dip

The first and most obvious sign of a turn in the war against the coronavirus pandemic and the market downturn is perhaps the most obvious one.

A treatment or cure that would make COVID-19 less severe or make it spread less. Either one would both reduce the pressure on hospitals, healthcare workers, and medical equipment. That in turn would save many lives.

It could also start ending this pandemic, or at least buy us time until a vaccine is developed.

Sign No. 1: a Treatment

The three most promising treatments currently being investigated are two antivirals, Remdesivir and Favipiravir, and an antimalarial drug called chloroquine (and its close relative, hydrochloroquine).

Remdesivir is an antiviral drug owned by Gilead Sciences Inc. (NASDAQ: GILD), a pharma company out of California. The drug has been tested against Ebola, where it failed, but also against SARS and MERS, two viruses closely related to the one currently sweeping the globe. In lab tests, it works against both, and the World Health Organization's team lead in China, Bruce Awylward, considers Remdesivir the "only drug right now that we think may have real efficacy."

It has already been used in Washington and California for severe cases of COVID-19, under a compassionate exemption from having to be FDA approved. The volume of those requests is so high that Gilead had to develop a special system just for Remdesivir, as requests for compassionate use of other drugs were being swamped.

The WHO has just launched a large, global trial of several promising treatments for coronavirus, and Remdesivir is one of them.

Favipiravir is a Japanese antiviral drug, made by a subsidiary of Fujifilm, which is targeted mainly against the flu.

In a Chinese study on 340 coronavirus patients, people given Favipiravir tested virus-free after a median of about four days, compared to 11 days in subjects that did not receive the drug. That's more than a 50% reduction, which would translate to much higher hospital capacity.

Ninety-one percent of patients given the drug also showed cleared lungs on CT scans, compared to only 62% without it.

However, this study is fairly small, and a larger one is needed to get more definitive results. Japanese officials have said that in their experience, Favipiravir does not work in patients where the infection has progressed too far. The drug may end up being added to the WHO's global trial.

Finally, we have chloroquine and hydrochloroquine. These are mainly antimalarial drugs, first developed in 1934. They are also used against some parasites, as well as against some autoimmune diseases.

While the drugs seem to act against a variety of viruses in lab cultures, including chikungunya and dengue, tests in people showed no effect. Lab cultures show only extremely high doses working against the coronavirus, but several studies in China claim to show that the drugs work well against the coronavirus at smaller doses.

However, the underlying data for those studies has not been made public, nor been shared with the WHO. This makes chloroquine a bit of a long shot, even though the drug has received much attention online and from U.S. President Donald Trump.

And these are only the top candidates. With so much drug testing going on, including a $125 million grant from the Bill & Melinda Gates Foundation, a treatment is bound to be discovered, even if it's not any of the drugs mentioned above.

Sign No. 2: Confirmation That Warmer Weather Will Slow Down the Virus

Several studies have recently come out suggesting that the new coronavirus spreads faster in places that are less humid and colder.

A Chinese study showed that the coronavirus spread faster in northern China, where the weather was colder and drier, than in southern China. Importantly, this study looked only at cases starting in Jan. 21 through Jan. 23, before Chinese authorities clamped down on the virus and its spread.

Another study, this one from Australia, also links higher temperatures to slower spread. And a study from a team at the University of Maryland shows that severe outbreaks of the new coronavirus have all happened in cities with a temperature between 41 and 51 degrees Fahrenheit, and low humidity.

Now, it's quite common for viruses to spread differently depending on the weather. Flu infections tend to peak in winter - we call that "flu season" for a reason. But these studies so far are preliminary, and we'll have to see more data before we know for sure.

If it's confirmed that warmer weather will help slow down the virus, that would buy America and Europe time. As spring gets going, the outbreaks here would recede, lowering pressure on hospitals and giving us more time to develop treatments and vaccines. For countries in the Southern Hemisphere, however, this could mean that the slow spread so far has been due to the weather, not their attempts to control it.

And it raises the specter that the coronavirus could come back in the fall, much like the 1918 global flu pandemic did.

Sign No. 3: Highly Populated Countries Managing to Keep the Virus in Check

India is the second most populous country in the world, with more than 1.3 billion inhabitants. Bangladesh, Brazil, Indonesia, Nigeria, and Pakistan together account for another billion people. So far, the numbers suggest outbreaks of the new coronavirus there have been limited.

In some cases, like India, that may well be due to lack of testing. But if these countries manage to keep the virus in check within their borders, that would be a massive boost to the world's fight against the virus.

It would massively reduce the risk that the virus keeps circulating and comes back next year. It would also mean more than 2 billion people not affected by shutdowns, lockdowns, and other necessary but economically harmful measures.

That would bring a lot of confidence back to the markets.

Sign No. 4: U.S. Unemployment Numbers

As more than a dozen states have now ordered all "nonessential" businesses shut to prevent the spread of the coronavirus, large parts of the economy have been put on hold. Restaurants, bars, hotels, and other parts of the hospitality industry have been most directly struck, with seemingly tens of thousands of workers laid off or furloughed.

That showed up in Thursday's new jobless claims report that hit 3.28 million. As Shah Gilani told you Friday, that's 11.6 times the week before, when 281,000 claims were filed, and 4.72 times the previous record of 695,000 Americans seeking benefits way back in the week ending Oct. 2, 1982.

The markets still rallied on news that the stimulus bill was moving ahead - but that might not always be the case on such dire job numbers.

Any good surprises going forward, in next Thursday's weekly and next Friday's monthly numbers, would start shifting the mood.

One quick but very important thought about this spike in unemployment: There are people in your community - even in your neighborhood - who are already being impacted by this sudden economic downturn. Service sector workers in nonessential businesses are being hit with job loss and high levels of employment uncertainty. Don't wait for the government to help them.

I'm hoping you'll join me in actively seeking out those who are impacted - and you can be one ray of hope in this gloomy situation. Cook some extra food and take the family a meal. See what you can do to help your local food bank or shelter. Send your barber/hairdresser, dog groomer, or favorite waiter some cash. Anything we do now is a huge help. I'll be writing more about some thoughts and encouragement in this area in a separate article.

Back to the unemployment numbers - unfortunately, the wild card in all of this is whether those numbers will be trustworthy...

Sign No. 5: The Wildcard - How Transparent Will the White House Be?

Look, it's no secret that despite the global economic turmoil and the threat of the pandemic, policymakers and politicians still have an eye toward this November's election.

That means we need to keep a close eye on what's being done and said, and maybe more importantly, on what's not being done and said.

Take unemployment numbers, for example. We know that the White House asked the individual states not to release their own unemployment figures before the Labor Department releases the national totals.

Obviously, that wasn't because the numbers were really good.

But it raises the concern that administration may not be fully transparent with economic data, similar to how U.S. Vice President Pence's coronavirus task force has been reining in what information government experts are allowed to share with the public.

If this lack of transparency on economic data grows serious, traders will react to the additional uncertainty. And in an already stressful and negative environment, that would create even more downward pressure on stocks.

On the other hand, a fully transparent and open process of showing how America is fighting through this process would bring confidence to traders, even if the numbers were bad.

It's just like in scary movies, where the most disappointing scene is usually when the built-up, horrifying monster is revealed to be nothing but a man in a plastic suit.

It's uncertainty that markets dislike the most. The truth, even if it's bad, is almost always more digestible.

I've got my eye on several rebound stocks that could set up for the trade of decade, and I shared some with you here. For now, think about stocks that were strong before the crash instead of trying to catch the falling knife on cruise line stocks and others that will likely suffer longer-lasting consequences.

In the meantime, click here to check out my colleague Shah Gilani's coronavirus roadmap to learn how to navigate each of the potential pathways the virus could take markets down. You don't want to miss it...

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About the Author

D.R. Barton, Jr., Technical Trading Specialist for Money Map Press, is a world-renowned authority on technical trading with 25 years of experience. He spent the first part of his career as a chemical engineer with DuPont. During this time, he researched and developed the trading secrets that led to his first successful research service. Thanks to the wealth he was able to create for himself and his followers, D.R. retired early to pursue his passion for investing and showing fellow investors how to build toward financial freedom.

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