Thursday happened to be one of the worst days for the market all year. Stock indexes dropped between 5-6 percent in the blink of the eye as the number of COVID-19 cases spiked higher in several states. Was that simply an excuse to sell, or should we be worried about a second surge?
As far as a second surge is concerned, I don't know what Wall Street is talking about. We are still in the initial phase of the pandemic. All that has happened is that a number of states are playing catch up with ground zero states like New York, New Jersey and California. Of course, it doesn't help that most states, like Florida, Texas, Arizona, Mississippi, Alabama, etc., have all but ignored the medical guidelines for re-opening their economies. This flouting of the best medical advice in favor of political partisanship has contributed to the sudden spike in cases since Memorial Day.
If investors spent a little more time listening to the epidemiologists, instead of bidding up airlines and cruise ship stocks, they would have realized that new cases would start to show up by the second week in June. And, like clockwork, that is just what is happening. But I believe this so-called "second surge" was simply the excuse traders needed to take profits in a market that had become way too frothy.
In my column last week, I wrote:
"Can we go even higher? I expect so. Look for the S&P 500 to hit 3,220-3,250 next week before pausing to catch its breath." The S&P 500 Index touched 3,232 on Monday before profit-taking set in. Thursday, that same index fell to the level I discussed with you two weeks ago, the 200 Day Moving Average at 3,002, and that is where it bounced on Friday.
Is it a coincidence that the new virus numbers coincided with the technical levels that I have been watching? You might think so, but I believe otherwise. As such, we should see some further correction next week after this bounce has played itself out. I am guessing we possibly break back down below the 200 DMA on the S&P 500 Index, depending on the virus news.
My reasoning: the surge in COVID-19 cases will continue into next week and beyond. That won't change. That should cap the market's upside, but not the downside. I believe investors will be jumpy until we determine the extent of the new virus surge.
A countervailing bull trend would be the argument that the medical community is now far better prepared to handle an uptick in virus cases, so further isolation tactics are not necessary, and we can expect fewer deaths. At the same time, both the Trump Administration and businesses are determined to re-open the economy. They are on the record stating that there will be no further economic shut-downs. That should support the stock market, at least temporarily, in my opinion, if things get out of hand (virus-wise) across the nation, than all bets are off.
Of course, both the bulls and the bears are avoiding a very ugly truth hiding underneath of all this financial, medical, and economic story-telling. The fact is that American lives are at stake. We are way beyond the worst-case estimate of 100,000 deaths and over 2 million virus cases and we are still counting. For our elderly community, this pandemic is a death warrant just waiting to happen.
The greatest tragedy of all is that most Americans, through their willful and selfish decision to ignore the rules as a matter of national political and economic policy, have made the decision that "the lives of the elderly don't matter." I can only say shame on us.
Bill Schmick is now the 'Retired Investor.' After working in the financial services business for more than 40 years, Bill is paring back and focusing exclusively on writing about the financial markets, the needs of retired investors like himself, and how to make your last 30 years of your life your absolute best. You can reach him at email@example.com or leave a message at 413-347-2401.
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