Feb 24 2020 - Don't Panic Sell; Buy. There Is Some 'Good' News Coming Out Of Korea


The classic definition of a correction is a 10% drop. So even at the lowest that the indexes are getting to Monday, I still believe the correction will remain more time-based than a classic correction.

You should be thinking about what to buy, not blindly selling on these headlines.

The media likes ginning up fear; it sells more advertising. Instead consider what the actual mortality rate is based on the data.

In a sharp sell-off, there might be some really good stocks that will resist the pull of this downdraft. If you are a trader focus on growth names that are standing up to it.

Don’t Panic Sell. Buy. There is some “Good” News Coming out of Korea

This note is more of an amendment to Sunday's piece. It was written before the latest epidemic news out of Korea. In that piece, I posted this chart of the S&P 500 and where I thought the index would fall to based on the news flow that I was working with at the time.


Source: Trading View

The red line was where I thought the S&P 500 index would fall before it would bounce. As I said, I thought the market would finish up for the day. Obviously, with this new news, the market is going to break that support and likely approach the level of the last big sell-off a few Fridays ago. I am adhering to the notion that this corrective phase is similar to the last one, in which we essentially chopped around below and even narrowly above the previous high. The fact that it looks like the market will be down 3% to 4% today does not diminish that notion; instead this action buttresses it. In fact, we set new highs last week in the teeth of the epidemic in China. I was wondering if my theory of how the market is behaving would be wrong. Clearly it isn’t. My mea culpa is that I didn’t take my own caution regarding the coronavirus “Dragon Tail” seriously enough.

That said, if you’re an equity investor and you’ve been buying a few shares of each position every day, you should double your level of acquisition today. If you are an options buyer, look to go long with an extended expiry to April or even May. You will be getting that extra month or two for free. Some might look to buy an even closer expiry and lever up. That could work too, if you realize the risk. The market is in panic mode, and a panic can extend via the momentum of the panic.

What the news organizations are not saying

The news out of Korea can be read as alarming. However, no one really expected that the virus would stay in China - no one serious, anyway. That said, the Chinese have actually done a lot better than the experts had been expecting. I say this even though I never believe anything Chinese officials say. That said, I believe the delta and the mortality rate. I say this because if China were fudging the rate of infection and the mortality rate, they would be shooting themselves in the foot. They need that data to guide policy. Leaving that aside, we do know that Korea is not fudging their numbers. Yes, it is concerning that the number of infected is going up fast, but what about the mortality rate? No one wants anyone to die, no one wants anyone to get sick, and I don’t want to sound like a ghoul, but let’s look at the data. We have 833 ill and 7 dead, which is a less than 1% mortality rate. That is a lower percentage than in the China numbers. In fact, it is likely as low as a bad flu outbreak since there are certainly uncounted ill that are not symptomatic. I bet the overall mortality rate is perhaps 0.03% or thereabouts. In fact, China's infection rate is now dropping.

Why are the news organizations not talking about what the mortality rate looks like or about the fact that China is improving? Well then there would be less of a panic, and people won’t be turning on CNN to find out what’s next, or going to their favorite website for more news. Less scary news, fewer eyeballs, less dinero.

The numbers might get worse before they get better

Look, Korea will likely have infected numbers going into the thousands, and you will likely have other country outbreaks aside from what's happening in Italy. All that said, the more information we get, the more I am certain that the coronavirus is not the worldwide deadly disease that will kill millions. That said, we will likely have more days like today. This is why cash is very important, and why having hedges is very important if you are a trader. As a trader I would look to get long today. Just make sure you leave some dry powder for the next sell-off. That means spreading your calls. If you have spread your calls, consider rolling that short call down, and rolling your long call to a lower strike this morning. When stocks bounce off of the lows, you can roll those positions up and out and capture some alpha. I believe we are likely at the end stages of this panic. That doesn’t mean this is the last, but it is likely the steepest sell-off. I am going out on a limb here, but I think we are likely headed to new highs by next Monday rather than new interim lows. That doesn’t mean the corrective phase is completely over, but I think we are getting there.

If the economy were going belly up, why all these acquisitions?

Last week we had the billion all-stock deal from Morgan Stanley (MS) for E*Trade (NASDAQ:ETFC). This week we have a merger Monday. TurboTax maker Inuit (INTU) is buying personal-finance technology portal Credit Karma for roughly billion, The Wall Street Journal reported, citing people familiar with the matter.

So if you agree and are thinking about stocks to buy...

Today would be the perfect time to look for growth stocks that are trading up. Perhaps in the teeth of the panic, there won’t be any stocks that can stand up to the wave of selling. So I would suggest waiting for the early afternoon. Also, I am not talking about consumer staple stocks or utilities. These are the “Safe Haven” stocks that are the usual go-to names. I am talking about the growth stocks: the Zoom Video (ZM), the Alteryx (AYX), The Trade Desk (TTD) - those types of stocks. I think buying the dip on the FANG names should be enticing now. Perhaps wait toward the close to buying these names as I expect them to be down into the close. I will wait till Tuesday for Amazon (AMZN), and Alphabet (GOOGL) (NASDAQ:GOOG). I think there will be good alpha coming off of Monday's jag to the downside.

Whatever you do, please think twice before you sell this morning. You are going to end up buying your positions back - only at a higher price.

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