Fear that the Chinese coronavirus is spreading are gripping the market this morning. The death toll in China has risen to 80 and there 461 people said to be in critical condition. The Center for Disease Control says it expects more cases to occur in the U.S.
Officials are working hard to contain the virus, but there are two major problems. The incubation period for the coronavirus can range up to 14 days and it is infectious during the incubation period. This was not the case with a prior coronavirus called SARS. There is no way to know how much this is spreading into the incubation period's end.
Largely due to this incubation period issue, China is extending its New Year Lunar holiday. The stock market in China will be closed all week, as will schools and many businesses. Credit Suisse in Hong Kong told its staff not to come to the office for at least two weeks if they have visited China.
This is a classic example of how the market hates uncertainty. There is no way to fully price in the ramifications of this, as no one knows at this point how successful government officials will be at containing the spread of this virus. The news media is also doing a good job of scaring people with blaring, negative headlines.
For more than a year, market players have rushed to buy any dip created by negative news, but that is not nearly as easy in this situation. The news has trapped many bulls and they will be looking for exit points. The likelihood is that a sharp bounce is going to be seen as an opportunity to lighten up. It is unlikely that there is going to be a V-shaped bounce back at this point with so much uncertainty out there.
To complicate matters, this is the biggest earnings week of the quarter, with reports due from heavyweights including Apple (AAPL) , Microsoft (MSFT) , Tesla (TSLA) , Facebook (FB) , Boeing (BA) , etc. Many of the big-cap stocks are technically extended and have very high expectations, so it is going to take some exceptional news to keep them trending higher in the current market.
While many market players are cringing at the sea of red this morning, this is the corrective action the market has needed for a while. None of the bearish pundits saw the coronavirus as a potential catalyst, but it is interesting how an issue like this occurs in tandem with the frothy technical action.
It is important to keep in mind that when corrective action like this occurs all stocks tend to sell off together. There isn't any real appreciation that some names may be good values. Sellers are dumping ETFs and other baskets of stocks and that means that everything sells off.
The good news is that broad selling eventually creates some significant mispricing in individual stocks -- and that will provide opportunity. The important issue is to not be in a big rush to jump, as this selling could last for a while.
Market selloffs like this eventually will produce good stock picking but timing is the key to success.
There is potential for this breakdown to pressure the market for a while. We'll see how well the dip buyers do in the early going, but I suspect that the initial bounces will be sold this time.