Monday saw gold hit a new seven-year high, and silver hit a six-month high.
Just as quickly, they both pulled back. Miners plunged. And the major indices — like the Dow and S&P 500 — rallied after getting whacked for days.
This leads many market participants to think the worst effects of the scare about the COVID-19 virus is over. Why, the market pullback wasn’t that bad at all.
Sort of like that scene in “Lord of the Rings”. You know, the one of Théoden, King of Rohan, at Helm’s Deep (Yes, I know all the character names. I’m that much of a geek) …
But as any “Lord of the Rings” fan can tell you, that was not all. Heck, the armies of darkness were just getting started.
I bet you know where this article is going. Stick around for the picks, though.
First, some facts that point to a less optimistic outlook …
- China’s own data shows that use of public transportation within its borders has fallen by 80%. China is very likely experiencing a recession right now. And that could have ripples throughout the global economy.
- To be sure, China is relaxing the rules that kept more than half that nation’s industrial base idle. They know better than anyone that they must get their factories back up and running. But the COVID-19 virus has now spread to every continent except Antarctica. Risks are rising.
- Nancy Messonnier, director of the National Center for Immunization and Respiratory Diseases at the Centers for Disease Control and Prevention, said on Tuesday that “the disruption of daily life might be severe.” She also called the virus “a tremendous public health risk.”
I sincerely hope that this problem is solved quickly. But the fixed income markets do not think that will be the case.
Fixed income (bond) traders are known as the “smart guys in the room.” And the bid in fixed income has sent yields there plunging to levels last tested in 2016. Here’s a chart of the 10-year yield against the S&P 500.
Bond yields are sometimes said to lead the broad market. If the bond guys are right, the correction in the broad market isn’t over. The correction in the broad market has barely begun.
To be sure, the market has other hurdles besides the Covid-19 virus.
We do have a presidential election coming up. One with potentially huge consequences for the country … and the market.
And there’s the fact that the market is overvalued by many measures, when major economies around the world are on the precipice of recession.
So, what are you to do? Let me show you one more chart for the VanEck Vectors Junior Gold Miners ETF (NYSE: GDXJ).
You can see that the GDXJ soared last week. Then it gapped higher on Monday (that big red “candlestick,” as we call it), and gave the gain back.
Yesterday, the GDXJ tested support from former overhead resistance, now turned support. It has further, deeper support at the 50-day moving average.
Where will the GDXJ go from here? In the short-term, my crystal ball is cloudy. But in the longer-term, I know that gold is in a new bull market. That spells much higher prices for the metal … and potential rocket rides for select miners.
I can think of three ways to play this.
- Buy select miners on pullbacks. Like the pullback we’re seeing now. It’s a good time to get busy. If you’re more cautious, wait for the next bounce after a pullback.
- Short the broad market using inverse ETFs. I’m not recommending you sell any particular stocks. After all, this crisis will end eventually. But you might want to put on some “insurance” in the form of inverse ETFs that move inverse — or double- or triple-inverse — whatever index they track. An example is the ProShares Short S&P 500 ETF (NYSE: SH), which moves inversely with the price of the S&P 500.
- Buy stocks that are leveraged to the COVID-19 coronavirus itself. Examples include Alpha Pro Tech (NYSE: APT), which makes surgical masks, and The Clorox Co. (NYSE: CLX), which makes Lysol, Clorox and a host of other disinfectants.
Maybe this nightmare ends today … or next week. But maybe it gets worse. If it does get worse, there are ways to play it. I know what I and my subscribers are doing. Whatever you do, don’t sit on your hands.
All the best,