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Will Coronavirus Ignite a Correction?

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January of the new decade was starting to look like a replay of two years ago when the stock market surged out of the gate and became unusually over-bought.

My favorite and very simple measure of how over-heated stocks became was flashing "extreme" levels: the Nasdaq 100 index was over 7% above its rapidly rising 50-day moving average.

Those occurrences are rare and typically turn into a meaningful pullback. So I advised my followers to take some profits and get a little more defensive a couple of weeks ago.

I said that while stocks like Apple, Microsoft, Intel and Lam Research could keep climbing to new highs -- and the upper realms of their valuation trading ranges -- we should be on the look-out for a 3-6% drop soon where we would be big buyers of all kinds of stocks, but especially Technology and Healthcare. All we needed was a catalyst.

And then along came the coronavirus, or 2019-nCoV to be precise, the seventh variety of crown-fringed, spherical influenza virus named for its visual symmetry with the solar corona.

What If It Goes Pandemic?

The last great pandemic was during WWI when the Spanish flu infected 500 million people globally and killed at least 50 million. Thus far, this coronavirus outbreak which began in the Wuhan province of central China has only challenged the 2002-03 SARS (severe acute respiratory syndrome) virus which infected about 5,500 and killed 800.

As of Tuesday, 2019-nCoV (the "n" is for novel) had made nearly 21,000 people sick and killed over 425, with the majority of cases still in China, only a dozen or so in the US, and less than 20 in Europe.

It's spreading quickly because it's a respiratory infection that takes 2 to 14 days to incubate and during that window can be transmitted from one person to another even when flu symptoms are not apparent. It shouldn't surprise anyone who understands the exponential growth curves of an epidemic virus to see total infections cross 50,000 this month.

And since coronaviruses originate in animals, from pigs to bats, it takes time to develop a new vaccine when a new strain mutates and transmits to human host cells.

But for comparison's sake, it's helpful to understand that seasonal flu can cause over 25 million outpatient visits and more than 200,000 hospitalizations each year. During the severe 2017-2018 flu season, one of the longest in recent years, estimates indicate that more than 900,000 people were hospitalized and more than 80,000 people died from flu.

So while the WHO has declared a global health emergency and has warned about the potential for a pandemic, it would take a lot more traction to come close to a typical flu season where 20K to 40K might die, depending on severity. 

What About China's Slowing Economy?

For investors, one of the other fronts we're watching is what impact this health emergency has on China's already slowing economy. Shutting down factories, transportation and shopping districts for even a few weeks will put a big dent in this quarter's GDP and could have rippling effects throughout Asia.

On Monday February 3, the Chinese stock market re-opened after their New Year holiday and fell almost 9% as it absorbed the previous 10 days of coronavirus news and business impacts.

But the Chinese financial authorities were also ready with stimulus measures from their central bank to make sure ample liquidity was available and to shore up confidence.

US markets barely flinched, even opening higher than last Friday's big sell-off lows. Stoking more confidence is word that Gilead Sciences has an experimental-stage antiviral drug which was originally targeted to treat SARS and Ebola. Gilead’s remdesivir seems to have worked on the one patient in Seattle and now, according to Bloomberg News, will be tested by a medical team from Beijing-based China-Japan Friendship Hospital for efficacy in treating the deadly new strain of coronavirus.

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Okay, Time to Buy the Dip Now?

It sounds like I've laid out a pretty good case for not worrying too much about the coronavirus. And as of Friday, we got our 3.6% pullback in the S&P 500 as well as a 3.3% hiccup in the Nasdaq 100.

Then Tuesday brought a big pop in the Nasdaq to new all-time highs on the back of a surge in Microsoft shares. This move prompted me to make a couple of juicy stock buys I’d been waiting for while their shares were still on sale.

But there is still a big unknown lurking in the data from China.

According to The Lancet, coronavirus forecasting models indicate there could be as many as 200,000 infections that are not yet revealed by symptoms, confirmed medically, and reported to authorities. This projection is based on the current transmission rates and doubling of infections every 5-6 days.

This sets up a potential surprise for investors when all of a sudden more data is available and the true size of infections is known. Imagine the day when we learn that there are over 100,000 people infected. Is the market ready for that surprise?

While this conjecture about unknowns could turn out to be wrong, I always insist on thinking in probabilities. Right now, the odds favor this pandemic getting far worse before it gets better and I don’t think the market is ready for that.

My Plan: Make a Shopping List

Whether or not we get another 5% down leg in the market, I’m getting ready to buy my favorite Technology and Healthcare stocks, looking for new highs in Q1 and into Q2. Some of these companies play in both realms, like Gilead the Biotechnology stock.

How do I get ready? With a shopping list. I already know which stocks I want to buy and in what price range I'm ready to place my order. And my plan isn't built around one magical day when I call the bottom. I start scaling into some positions early and gradually, especially the ones I think will bounce hardest and first.

Again, I'm not calling for a big double-digit correction in February. But when the S&P index pulls back 5% after a strong run, it means lots of midcap and smallcap stocks will be down 20-40%. And that's a very attractive opportunity for an investor-trader like me.

Have you started building your shopping list yet? If not, now is a great time to get started. 

How to Capitalize on 2020’s Most Exciting Opportunities

As mentioned above, I’m keeping a close eye on the Technology and Healthcare sectors. And Biotech – where these sectors overlap – could be the fastest way to grow your wealth in 2020 and beyond.

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Scientists are discovering exciting new ways to prevent and treat thousands of diseases. These discoveries are mind-blowing, from immuno-oncology, which enables the body to cure many types of cancer by itself, without chemotherapy or surgery… to gene editing, which can slice out segments of DNA that make us vulnerable to HIV/AIDS, muscular dystrophy and other diseases.

The Biotech sector is expected to surge beyond $775 billion in size by 2024. What better way to invest than in projects that can make improve human life and health on a global scale?

My recent recommendations in this sector include gains of +43%, +83% and +164% gains in as little as 9 days.¹

While I'm bullish on the Biotech sector in general, there are 7 specific stocks I believe are poised for particularly strong upside in the coming year – especially if the market pulls back 3-6% in the near term.

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Good Investing,

Kevin Cook

Kevin, Senior Stock Strategist at Zacks, is a leading expert in biotech and medical stocks. He provides commentary and recommendations for Zacks' investment portfolio, Healthcare Innovators.

¹ The results listed above are not (or may not be) representative of the performance of all selections made by Zacks Investment Research's newsletter editors.