The V-Shaped Recovery Bet

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Market indices keep advancing regardless of the potential drastic impact of the coronavirus on the global economy.

"Alibaba warned that the disease is having a fundamental impact on China’s economy, and nearly 86,000 domestic and international flights in and out of China were canceled Jan. 23-Feb. 11, or 34% of scheduled services." (Source: Bloomberg)

It appears that investors are betting on a V-shaped recovery. That's a tough pill to swallow when there's nothing to 'recover' from as far as stock prices are concerned. Moreover, Chinese airlines are putting workers on leave, and firms such as AstraZeneca are warning of a tougher outlook. Still, stock indices keep clawing their way to new highs. 

While money managers continue to cite SARS as a historical precedent to justify staying the course, I'd like to once again emphasize the difference between this coronavirus and precedents such as SARS and the Asian Flu, both of which occurred right at the end of bear markets, not at the height of a massive bull advance. Bull markets die of recessions, not old age. Hence, our two recessional headwinds remain the political risk and the coronavirus. As far as the strong employment picture, employment has never been a predictor of looming recessions; History has shown us time and again that recessions are always preceded by periods of maximum employment. So, when someone says "I don't see it", I understand. Also, remember what the markets have done since 2010-2011 when unemployment was still 10% and Europe was supposedly coming unglued.

Technically, the S&P 500 is on track for a monthly TD Sequential Sell 9-13-9 in May, though I do expect a top to possibly begin forming as early as March or April. Until then, there's no point in fighting the tape, accommodative central banks, and a V-shaped recovery collective mindset.

As far as gold, the $GLD had a '5 percent day' session yesterday, the second time in recent days. Hence, a move above yesterday's high of 148.58 should be construed as bullish.  Give it time.

The three main things that are front of mind for me are:

  1. The $IEF (7-10 year treasury bond ETF) recouped all of the September-December losses in January, registering a monthly bullish price flip.
  2. The yield curve doesn't look too encouraging here. The 10-yr/2-yr differential has crossed under its 200-ma, falling from 0.18 to 0.17 yesterday.
  3. Crippled by travel bans and airline restrictions, the Transports apparently don't matter anymore, as if Dow confirmation theory has now fallen out of style, and suddenly Tech has taken precedence. You can't move people and stuff around the world, let alone in and out of the second-largest world economy, without the transports.


Markets like to push the envelope to trap as many participants as possible, bulls and bears alike. We're not there yet, but close. As such, my targets for the indices remain as follows:

$DJI: ~30726. That's 4.4% higher relative to yesterday's close.
$SPX: ~3451-3482.50. That's 3.2% higher, although the ideal fifth-wave ending for the bull run since October 3rd is at ~3512. That's 4.1% higher and in line with the $DJI's.
$SOX: ~2057. That's 4.9% from current levels.
$NDX: ~10028-10,100, roughly 4% from current levels.
$COMPQ: ~10170.

As a final thought, remember that even before the coronavirus, the 2020 outlook called for no more than single-digit gains. That would be in the vicinity of 3,500 for the S&P 500. I don't have a crystal ball. No one does. But the best I can hope for is to be able to manage risk the best I can as I continue to vigilantly watch the price behavior. I haven't always done that well.

Trade well,



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