Market is still underpricing coronavirus impact on the U.S.

by zg44

I finally had time this week to do coronavirus research and the number that sticks out the most on coronavirus in the US is 1,583. That’s the number of people the CDC has tested in the US so far. Even if you include state-level testing, the numbers probably don’t reach more than 3,500. (Many have been tested multiple times, so the total number of tests is around 6k).

That’s extremely worrisome at this stage. Virtually every other country with 100+ cases has run many times the number of tests that the US has run, and those countries all have far greater testing capability at the moment. The only country that’s handling this as poorly as the US right now is Iran; that’s bad company to be in…

The US is at least 2 full weeks behind the curve on coronavirus in my opinion, and that means markets are 2 weeks behind the curve on coronavirus.

So what does this mean for markets? It means that there’s real potential for the US outbreak to get much worse, and we have no real idea how bad the actual situation is here.

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There’s only 2 scenarios here:

1) That there’s no major outbreak in the US beyond what we’ve seen, and we experience a quick V-shaped recovery in markets in 2 weeks when we’ve run 50k+ tests and the number that test positive is only around 1k by then.

2) After we dramatically increase testing over the next 2 weeks, we start to see positive test numbers escalate dramatically (approaching several hundred or 1k+ a day), and we start to see business activity dramatically decline in the US.

I think we’re far more likely to be in the 2nd scenario right now because of how thoroughly this has been mismanaged by US authorities; the US should’ve been ramping up testing weeks ago to try to squelch this. We should have had 20k+ tests done by now. Due to that deficiency, we’re much closer to needing a Chinese-style shutdown of major cities to actually halt this by April/May.

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How to trade this? There are likely to be more dead cat bounces because investors have been programmed the past decade to believe “STOCKS ONLY GO UP” (like this past week which was a giant dead cat bounce), and I’d load up puts into those if we don’t see testing numbers increase fast. Every day that we’re not testing much larger numbers of people is another day that we fall behind the curve and make the eventual scope of the problem worse (see Iran).

And here’s the kicker, fresh off the Florida press: “Gov. DeSantis says one of the Broward coronavirus cases is a person who worked at Port Everglades checking people in for a cruise line.”

TL;DR: It’s way easier to see SPY 250 than SPY 350 in the market’s immediate future.

 

 

Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence.

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