The Coronavirus Stock Market Connection: Do Outbreaks Impact Markets?

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The Coronavirus Outbreak and Stock Market Connection - Dow Jones

No people in Wuhan, C China’s Hubei will be allowed to leave the city starting 10 a.m. of Jan 23. Train stations and airport will shut down; the city bus, subway, ferry and long-distance shuttle bus will also be temporarily closed.’

This was posted on the People’s Daily, China twitter account.

I want to believe it…I really do. But I think it’s way too late for them to be saving face.

With 653 confirmed cases and 18 deaths…it’s any wonder how long until the WHO will declare an emergency.

Here’s a map of where this virus has spread to so far…

Port Phillip Publishing

Source: gisanddata.maps.arcgis.com

[Click to open in a new window]

The Coronavirus is spreading like wildfire

What you’re looking at above are the reported cases in orange. And suspected cases in yellow.

As you can see, it covers quite an area.

Anyway…

I thought I’d do a bit of a study on how these viruses impact the stock market.

And I’ve found an interesting connection…

All right, you may suspect I’m over-analysing. I do tend to do that.

But hear me out…

In 2002, China was in denial about Sars…they denied its existence and even concealed it from its own people.

In 2009, you experienced the swine flu. That was the H1N1 influenza virus.

Now, the interesting thing about these two virus outbreaks was that they occurred either during or just after a recession.

Is there a connection here?

All right, I definitely don’t have enough data here to call this experiment complete.

But it was an interesting observation, nonetheless.

The important thing to know is that…

In both these cases, the stock market did not suffer from any major fall. At least not directly relating to the virus.

Which should be good news if you’re long on the markets right now.

But that doesn’t mean that can’t and won’t come down.

I’m just not too sure if the connection between a virus and the stock market is valid. That’s all.

But here is something you may find useful.

I’ve attached a chart of the Dow Jones below. Take a look at it…

Port Phillip Publishing

Source: TradingView

[Click to open in a new window]

What you’re looking at is the Dow Jones. It’s a weekly bar chart going back to the end of 2018.

I’ve drawn these lines on the chart.

That’s grey, yellow and red. Can you see them?

This is the Dow Jones support levels.

The reason why you would draw these on your chart is to give you an idea of how far the market can fall.

And when it does fall, to give you an idea on where the market may stop falling.

Of course, I’ve highlighted three levels only. If you kept trying to find more support levels, we could end up with at least another three.

But let’s keep this simple.

Take a look at the chart again. Because the higher the market goes, the higher the chance of a pullback.

Pullbacks are important. They’re both needed and healthy to the long-term up move.

Here’s some clues to a potential pullback

The grey support level is the highest. It would mean from today’s close, the DJI could fall 3.22%.

The yellow line would give us a 6.39% decline in the DJI.

And the red line would indicate an 8.58% decline.

Again, these are from today’s prices. The higher the market goes, the bigger the gap.

If the market is going to move higher, we’d want to see a fall soon.

Because the higher the market goes without one, the more dramatic the pullback will be later on.

This could result in selling at the wrong time. Or, for new investors, having investments suffer quite a decline.

Unfortunately, a pullback in asset prices isn’t a matter of if, but when.

Just keep that in mind.

Have a great weekend!

Jonathan Evans Signature

Jonathan Evans,
Analyst, Profit Watch

 

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