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The now-global coronavirus outbreak is still the main driver behind the markets – no surprise there. And after last week's record falls ended with a small rally into the close on Friday, traders were looking for good news over the weekend to keep the rally going.
But what they got instead was very mixed, and I'm not optimistic about this week.
As we've discussed before, traders are looking mainly at three factors to calm markets: the response to the outbreak from public health agencies, any help from central banks to ease the pain, and a solid but prudent response from national governments on travel restrictions and borders.
Over the weekend, central banks were the most helpful. The U.S. Federal Reserve, the Bank of England, and the Bank of Japan all issued emergency statements, saying they were ready to inject liquidity into the markets and ensure stability.
That sent Dow futures up several hundred points overnight. Fed Funds Futures contracts (the instrument that traders use to hedge positions based on upcoming rate changes) now show almost all traders betting on the Fed lowering rates on March 18.
But most of that upswing disappeared by the time markets opened this morning. The reason is that on both public health response and on government policy, traders are worried.
We're digging in for a long siege – and that means, paradoxically, we're likely to see some "crisis jumps" ahead.
It may seem counterintuitive, but most big single-day market gains come during otherwise down markets. Central banks, especially the Fed, cutting rates or injecting money into the market would give stocks a big boost for a day or two.
Here's what I'm recommending that you do about those jumps…
Government Bungling May Make Quick-Hit Plays a Bad Bet
The spread of the COVID-19 coronavirus from Italy across Europe and to Manhattan shows that temporary travel restrictions and screenings are not working to contain the virus.
But the most concerning has been the continued bungling of the U.S. public health response, especially from the U.S. Centers for Disease Control and Prevention (CDC).
In San Antonio, the CDC released a quarantined patient after two tests showed them to be negative before waiting for the results of the third test, which turned out to be positive. This was over the protests of the local medical community and may have spread the virus further.
In Atlanta, a CDC lab tasked with making test kits for the coronavirus is under investigation after the U.S. Food and Drug Administration (FDA) reported contamination there, rendering all the kits made there unreliable.
Finally, news broke over the weekend that the CDC designed its own test kits for the coronavirus outbreak, rather than using the World Health Organization's design like every other country. The CDC kits didn't work, and it's taken weeks for the problems to be fixed. That's put our screening and testing efforts weeks behind schedule.
The lack of transparency is not helping either, as all government information has to go through U.S. Vice President Mike Pence's office before being released. The official story is that there is no reason for concern and that everything is under control, but there that doesn't seem to be the full story. This is one of the current biggest Reality Gaps – what we're being told about readiness to deal with the virus in the United States and the actual state of preparedness. As of now, we have time to recover, and that recovery toward getting testing, containment, and treatment preparedness on track will be on the key factors I'm watching.
Traders are just not trusting that the government has things under control. That's a recipe for more volatility in the market. It's not just the fear that harsher travel restrictions will be unpleasant for us personally. The economic consequences of interrupted travel and trade within the United States would be very bad.
In short, things will get worse before they get better.
Here's What to Do
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.