Why doesn’t the market care about coronavirus?
I recently received this question which prompted me to look into the subject a bit further. With the S&P 500 and and the Nasdaq trading at all time highs, one could easily assume that the market does not care about the potential impacts of the coronavirus.
However, a look under the surface may serve to refute this conclusion. One of the biggest concerns that I have heard and read regarding the spread of the coronavirus is that it will impact global growth in a negative way. One of the best ways that I like to use to get a gauge on the investors’ view on the global growth picture is look at the ratio of copper to gold. Copper is an industrial metal that is widely used throughout the global economy for various manufacturing purposes. Gold is a precious metal that is largely seen as a store of value in times of uncertainty. The chart below depicts their relationship to each other clearly. When the line is moving lower, as it was for much of 2019, and is doing so again in the early days of 2020, it signals that copper is lagging gold. The ratio is in a clear downtrend, below the declining 50 and 200-day moving averages. Currently, the ratio is on the verge of breaking support. The RSI has rebounded from a deeply oversold position but remains in bearish ranges. It is also interesting to note that during the advance from September to December, the RSI failed to become overbought. This tells us that the downtrend has momentum and is likely to persist as investors remain concerned about the global growth outlook.
To take this point a step further, we can look at how growth is performing. If investors are concerned about slowing growth, they are likely willing to favor the stocks in the market that are actually growing. The Vanguard S&P 500 Growth ETF (VOOG) has a Very Bullish Chaikin Power Gauge Rating and has seen the intensity of its outperformance increase since the start of the year. The OB / OS Indicator is moving higher and Chaikin Money Flow is bullish. VOOG is above the rising long-term trend line and has a bullish Power Bar Ratio of 65 to 33 as the fund trades at record highs.
Additionally, concerns about growth should manifest themselves in the equities that are levered to Crude Oil, a commodity that tends to perform well when investors are optimistic about the growth outlook. The Energy Select Sector SPDR Fund (XLE) has a Very Bearish Chaikin Power Gauge ETF Rating and has been lagging the SPY for more than a year. The OB / OS Indicator is moving toward an overbought condition and Chaikin Money Flow is bearish. XLE is below the declining long-term trend line and has a bearish Power Bar Ratio at 1 to 12.
Finally, when investors are concerned about potential uncertainty, they tend to gravitate toward the largest stocks in the market. The Vanguard Mega Cap ETF (MGC) has a Bullish Chaikin Power Gauge ETF Rating and has been leading the SPY since November, with the intensity of outperformance increasing of late. The OB / OS Indicator is moving higher and Chaikin Money Flow is bullish. MGC is above the rising long-term trend line and has a bullish Power Bar Ratio at 74 to 30.
The point is not that the market doesn’t care about the coronavirus but that its impact is showing up in different areas of the market. Now, and always, when making investment decisions, it is important to look beyond the major averages. By taking the analysis a step further, we can spot the opportunities that exist regardless of the prevailing news cycle.