Stocks Down On Coronavirus, Support Nearby
The major indexes dropped by roughly 3.5% yesterday as the number of coronavirus cases jumped outside of China.
While the health risk remains low in the U.S., the ongoing outbreak, the travel restrictions which are impacting the flow of people and goods, and the supply chain disruptions, are weighing on stocks.
Estimates are still only calling for a relatively small impact on the U.S. economy (just two tenths of one percent off of Q1 GDP, and maybe another two tenths later in the year). But in all fairness, the longer the outbreak continues, and the longer the disruptions go on, the greater the impact will be. And that's the big unknown right now.
Fortunately, the U.S. economy is strong and can absorb these potential shocks. Nonetheless, there will be a negative economic impact. And that's what traders are attempting to assess.
Looking at support levels, we listed them yesterday at 3,306.92 (which was a gap left on the chart from 2/4); then 3,268.44 (which was a gap from 2/3); then 3,205.48 and 3,182.68 (both gaps going back to 12/19 and 12/13 of last year).
The market blew through the first two levels, getting as low as 3,214.65, which was almost the exact same low point as January 31st (3,214.68), when the coronavirus first weighed on the market.
With the S&P closing at 3,225.89, near-term support comes in at yesterday's low of 3,214.65, and then the previously mentioned 3,205.48 and 3,182.68. That puts the nearest support level as little as 0.35% below current prices, and the furthest mentioned support level just 1.34% away.
Given the strength of our economy, I'd be a buyer on any further dip.
Especially since stocks are expected to soar once the worst of the outbreak is over, and pent-up demand is unleashed.
In the meantime, officials and organizations around the world are working to contain, treat, and prevent the virus.
And the administration is expected to ask Congress for $1 billion to combat the virus, as well as fast-tracking the creation of a vaccine.
The market was due for a pullback and some profit taking. All pullbacks seem scary when they are happening. But keep your eye on the big picture. And don't get spooked out of what looks to be a temporary setback in a record economy and historic bull market.
See you tomorrow,
Kevin Matras
Executive Vice President, Zacks Investment Research
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