Coronavirus Weighs On Stocks, But Earnings Season Presents Opportunity
Stocks closed lower yesterday with the major indexes giving up about -1.5% or more.
Growing concerns over the coronavirus has weighed on stocks as the infection count in China expands, and another case (now 6) was reported in the U.S.
Worries over the potential economic impact are real. Although, the magnitude of the impact will likely depend on the length of the outbreak and the inability to contain it.
But travel and lodging related industries have taken an immediate hit. Same with gaming companies, especially those with exposure in China.
We're also seeing oil prices sink. This might be a bit premature. But with China considered the biggest driver of oil demand growth, it's easy to see how energy consumption and thus prices could be affected, even if it's overdone and temporary at this stage.
For perspective however, it should be noted that S&P companies 'only' get about 6% of their revenue from China. But again, if the outbreak spreads, global tourism will be affected, and with it, sales of all types of products.
Some are making comparisons to the SARS outbreak in 2003. Although, China is being credited with a stronger response with this virus.
But even so, the impact on U.S. stocks back then was mild. And markets here at home and around the world rebounded quickly.
For now, we can only watch to see how this virus develops and how the world's health organizations and governments react.
From a personal standpoint, we should all take the necessary precautions to guard against catching it.
But from an investment standpoint, I would be looking to buy the dips.
Near-term support for the S&P come in at the following levels: 3,205.48 (which is a gap left on the chart from 12/19/19, and only represents another -1.18% pullback); then 3,198.79 (which corresponds to the 50-day moving average, and only represents a -1.38% pullback); and then 3,182.68 (which is a gap left on the chart from 12/13/19, and only represents a -1.88% pullback from yesterday's close).
Will we see any of those levels hit? I don't know. But that would be a great place, in my opinion, to 'buy the dip'.
For the record, there now exists a gap overhead as well at 3,281.53, between Friday's low and yesterday's high, and represents an upside move of 1.16%.
So those are the chart points that technical traders will be looking at.
In the meantime, the coronavirus will likely keep volatility high.
But with earnings season continuing to impress, and with plenty of high profile companies reporting this week, we could see some big opportunities for gains.
See you tomorrow,
Kevin Matras
Executive Vice President, Zacks Investment Research
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