I believe great traders and investors need to have “strong opinions, loosely held”. Using all the best information and data available, you have to form an opinion to take a position or make the trade. Strong opinions help you have the confidence to pull the trigger.
Yet, those opinions must be held loosely. This means that if the data change or the meaning behind the data changes, you must be able to change course. You must be able to close or reverse a trade when the original investing or trading thesis has changed. This “strong opinions, loosely held” mindset allows us to make money in up markets, down markets, and sideways markets. This approach also enables us to see the opportunities at extremes and act boldly.
In the case of the COVID-19 outbreak, you needed to be able to change your market directional bias because the data (or the validity of the data in this case) changed over the last few weeks. I have had to change my market opinions over the course of the last month from strong bullish to strong bearish.
Prior to a vacation in Mexico a few weeks back, I had a strong bullish bias. Early in the COVID-19 outbreak, I saw indications that market participants were interpreting coronavirus as having a modest to light impact on the market. That allowed me to identify some great short-term winning trades with confidence. But that strong bullish opinion was loosely held – ready to be updated with new data, for which I was – and continue to – scan constantly.
After processing key data and information on the virus back in mid-February, I turned cautious at first and then quickly outright bearish – because that’s where the data led. Now, my current narrative is that as long as the coronavirus growth rate remains high in the U.S. and western Europe, we have more downside to come. This and several other factors lead me to believe that the markets haven’t hit a bottom.
One key indicator for me was the minimal effect of the Fed’s emergency interest-rate cut last Tuesday. After the Fed announced the 0.5% rate cut, the market pop was erased in an hour. In fact, the cut may have made things worse by giving traders the impression that the Fed was more concerned about U.S. economic health than previously thought.
Let’s look at what I see as the biggest issues that could help the market find a mid-term bottom.
Turning the Tide
Here’s the simple reason this matters – the global economy looks in danger of slowing down massively if the COVID-19 containment efforts get much larger.
The official number of coronavirus cases is far from the reality. We have seen several missteps from the Centers for Disease Control and Prevention (CDC) including unrealistic restriction on testing and lack of working test protocols. The case numbers are growing here but the U.S. has certainly documented only a small percentage of the cases that actually exist. Just yesterday the CDC announced that almost 5,000 tests have been performed – a still very, very low number — after they reported 2,000 tests had been performed as of late last week.
The market is still living in fear. Here’s a monthly bar chart that shows the S&P 500 and the Volatility Index or VIX that shows how much extra premium is being charged for stock options. The VIX is also called the “fear index” and we’ve only seen readings as high as they have been this week once in the last 30 years:
You can see that the risk premium at the big 19.9% market drop into Christmas Eve of 1918 was nowhere close to the current level.
So what is needed to allay societal and trader fears and turn the tide against COVID-19? From a science and medical perspective, here’s what we will need:
- Figure out how long the virus lives on inert surfaces, especially on currency.
The rising number of COVID-19 infections that can’t be traced to previously known cases makes people worry that it can be caught from touching anything that infected patients have touched. Currently it is theorized that COVID-19 might be spread by touching a surface with virus particles on it and then touching your face, but this has not been verified by scientists. If real, it is thought to be a rare way of catching the virus. The CDC recommends wiping surfaces, washing hands carefully, and not touching your face – but we’re operating in the dark here.
- Figuring out whether warmer and sunnier weather will stop the outbreak.
Some viruses, including flu and the common cold (which in about 15% of cases is caused by a different kind of coronavirus from COVID-19), tend to spread much more slowly in warmer months. If that holds true for this virus, then countries in the northern hemisphere at least could see an outbreak slowdown by late spring. For other viruses, however, weather makes no difference, and we have no idea right now if COVID-19 is sensitive to heat and light.
- Definitive understanding of transmission mechanism (so people can have comfort knowing how to protect themselves, how close they can be with others, etc.), and definitive info on how long the incubation period is.
The CDC makes a point of emphasizing that “we are still learning how [COVID-19] spreads,” so we really are not sure. It is thought that droplets from sneezing and coughing are the main and perhaps only source of infection. However, being infected from touching a handrail someone sneezed on, or maybe even a package or a piece of mail, has not been ruled out. We do know that other coronaviruses have far less contagious levels and require more direct means of infection. Even if incidental contact with the virus on a surface happened, you would still have to then touch your face with the same hand to transfer the virus particles from the object to your airway.
There have been reports of people being re-infected after already having had the virus. There have been other reports about people with no apparent symptoms infecting others with the virus. The CDC insists that both of those situations are unconfirmed and, if true, are unimportant sources of spread. Official guidance is that people who may be infected be isolated until all symptoms (sneezing, cough, pain, fever, etc.) disappear and two separate tests for the virus, at least 24 hours apart, show no sign of infection. This isolation includes not sharing the same air as others which is quite a serious measure.
The CDC and other authorities around the world are also recommending a 14-day period of quarantine for people who might have been exposed, but are not showing symptoms yet. This is to make sure that if they do become sick, they do not infect others. However, this 14-day period is based on the longest incubation period (time from infection to visible symptoms) of other coronaviruses. COVID-19 has possibly a longer incubation period than that. We don’t know.
- A quick test – one that can accurately determine whether someone is infected or not in minutes, not days
MIT and several hospitals are working on faster tests for COVID-19, including cheek swabs that could reveal whether a person is infected within minutes or an hour rather than days. This would be a huge boon in fighting the outbreak as people with a possible infection must be treated currently as if they have COVID-19 while they wait days for their test results. That means some people without a COVID-19 infection are being put in special isolation wards which are expensive and rare.
Researchers in Hong Kong have developed a test that can detect COVID-19 in only 40 minutes and that test is now being used in parts of China. The team is expanding production to try to meet international demand, but no word yet on how accurate the test is or whether an emergency FDA application has been submitted.
Some other tests are in the works but no timeline on when some of the faster ones might be used in the U.S.
- Creating a cure for the infection (or at least for the ~20% who develop serious symptoms) and a vaccine to protect against infections
There is currently no cure for COVID-19 infection, and serious cases are treated with “support” where patients are given fluids, pain relievers, fever reducers, lung ventilation, and so on.
Some areas are experimenting with antiviral medication otherwise used for the flu, HIV, or Ebola. In very early testing, some of these medicines appear to be working, but the mechanism is unclear (anti-flu medication targets parts of the flu virus that COVID-19 doesn’t have) and further study is needed.
The best chance for a short-term breakthrough is finding an existing drug that is at least modestly effective against COVID-19. The Bill and Melinda Gates Foundation has paid for 15,000 different molecules, all used in current antiviral medication, to be tested rapidly for effectiveness against COVID-19. The cost for such a treatment would be much, much lower than developing a completely new drug. In addition, if a good drug candidate was found, trials could be expedited as these molecules are already approved and their side effects are known.
Most experts agree that a vaccine is eighteen to twenty-four months away at best.
A number of companies are currently working on short or longer-timeline cures and drugs for COVID-19.
- Gilead Sciences is Stage 3 testing remdesivir, a failed Ebola drug, on a small scale in the U.S. and China, and is recruiting for a large trial. That drug has shown some effectiveness in lab testing against SARS and MERS, both related to COVID-19.
- Moderna Therapeutics identified a candidate for a COVID-19 vaccine just 42 days after the virus’ DNA was sequenced, setting a new record. A Stage 1 trial in cooperation with the National Institutes of Health is starting in April. The company has never gained FDA approval for any of its drugs, however, and most drug candidates in Stage 1 testing never get to Stage 3.
- CureVac expects its COVID-19 vaccine to be ready for Stage 1 testing in a few months. Like Moderna Therapeutics, it uses strands of RNA (which is similar to DNA) to “trick” the immune system into attacking the COVID-19 virus.
- Pharma giant GlaxoSmithKline is one of the world’s largest vaccine-makers and is giving a private Chinese company access to its collection of compounds that boost the effectiveness of vaccines. No word yet on when a Stage 1 trial could begin.
- Inovia Pharmaceuticals believes it has the technology to rapidly develop vaccines based on the DNA of a virus or bacteria. It is preparing for Stage 1 trials of INO-4800 later this year with a Chinese partner.
- Johnson & Johnson is working on a vaccine based on a “deactivated” version of COVID-19. This means that real parts of the virus, treated to be inert, harmless, and unable to cause disease, are used to prime the immune system to fight against the real thing. The company is also working on treatments for already infected people. There are no timelines for either.
- Regeneron Pharmaceuticals creates human antibodies in genetically engineered mice. It is working on exposing those mice to harmless versions of COVID-19 and then harvesting the resulting antibodies as a treatment for infected humans. When the company took this approach during the 2015 Ebola outbreak, the resulting treatment doubled the survival rate of patients. No timeline.
- Sanofi, a vaccine maker with several successful vaccines under its belt, is working on creating a hybrid of a harmless virus with some parts of COVID-19’s DNA. This could prime the immune system to attack that DNA without causing disease. Sanofi expects Stage 1 trials in 12-18 months, and approval at least three years away.
- Vir Biotechnology is working on using antibodies from COVID-19 survivors to see if they can be used as a treatment for infection. No timeline.
As the science and medical professionals tackling these issues make progress, the virus will be contained at some point and the markets will respond with huge upward moves. The quicker we are able to slow the spread of the illness, the lower the impact of an economic shutdown will be. For now, we’re still at the stage where governments and private companies are necessarily over-reacting with “work from home” edicts, travel restrictions, and different levels of quarantines.
Until we can answer some of the science questions, trying to pick a market bottom is likely to be a very costly endeavor. There will be a chance to put some quality names back into your portfolio coming up but I think a little patience from here will likely get you a lower entry price.
God Bless You and Great Trading,