Tuesday market gave hope that stock markets might be able to find a bottom. There's optimism Congress can finally agree on a fiscal stimulus package that will help Main Street and not just big companies and Wall Street. And the White House is pushing for a quicker return to work for many Americans should progress on containing the spread of the coronavirus warrant it.
The big question I'm hearing, and have been hearing for weeks, is this – Are we at the bottom of this historic market drop?
The market's reaction to the stimulus bill still will tell us a lot about whether we've hit a short-term bottom. If the market acts like it has after Fed announcements – a quick move up followed by a reversal back down, then the chance for a short-term bottom is slight.
If, however, the market can hold the gains it makes on the announcement of the passing of the stimulus bill, there's a strong probability that Monday's low can the first near-term bottom that we've had in this epically fast market crash.
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But 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 one 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. The Dow is down 35% for the year.
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…
Watch for These 5 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 #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 WHO'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.
91% 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 coronavirus, but several studies in China claim to show that the drugs work well against 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 President 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 #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 January 21 through 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 #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 here 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 two 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 #4: U.S. Unemployment Numbers
About the Author
Nationally recognized technical trader. Background in engineering, system designs, and risk reduction. 26 years in the markets.