WASHINGTON – Last week, whether they’re investors or not, Americans found themselves bombarded with a confusing array of news headlines. The media did its best to keep the Senate impeachment trial in the forefront. More scary stuff emerged about the coronavirus epidemic that’s spiraling its way out of China, frightening individuals and Wall Street investors alike with its implications. And, oh yes, the Brexit is now final. It’s all been an auspicious start to 2020, the Chinese Year of the Rat. ##### From one Rat to another
Personally, I was getting ready to celebrate this Chinese Year of the Rat this weekend. (Before all the bad... stuff... hit the fan.) Mainly, I wanted to get in the spirit because I am one - a rat, that is - according to my birth year in the Chinese astrological scheme of things. Americans generally don’t like rats. Chinese or otherwise. But we zodiac rats happen to be really cool people, at least according to Chinese folks who follow such things. Writing for my old hometown newspaper, The Cleveland Plain Dealer (via Cleveland.com), John Petkovic lays out in chapter and verse the finer qualities possessed by those among us fortunate enough to have been born in Years of the Rat Past.
“You're charming and likeable. Sharp and adaptable. Entrepreneurial and, well, yes, a tad stingy.
“Squeak, squeak, you are a rat and it’s time to stand up for this is your year. Saturday marks the beginning of Year of the Rat according to the lunar calendar.
“Rats and those born in the Year of the Rat are known as leaders in business and culture. As such, prognosticators see the New Year as bringing prosperity and possibilities. Of course, all bets are off if greed and wild speculation overcomes good sense. (Remember the global economic meltdown when the Rat last ruled, in 2008?)”
Charming and likeable? Sharp and adaptable? Entrepreneurial, but a tad stingy? Gosh, how did those astrologers know? Clearly, those born in the Chinese Year of the Rat are way cool, indeed. ##### The last Chinese Year of the Rat was not so hot for anyone
It’s too bad, though, that John also noted how crappy the last Chinese Year of the Rat happened to be, just 12 years back. That Rat Year kicked off the Great Recession in earnest. It’s taken many Americans the entire 12-year Chinese New Year cycle to recover from that economic catastrophe. ##### Will the coronavirus panic clobber stocks again?
As for 2020, judging from this past week’s scare headlines, it looks like that incoming coronavirus pandemic could knock us all off our economic game once again. Could this Chinese Year of the Rat be an instant replay of 2008? It will be for sure, at least according to the news media, which can never pass up a terrifying story, even if there’s no real proof that it’s true. What a bunch of negative fabulators. The truth, at least at the moment, is that this nasty, flu-like bug with a pneumonia chaser may indeed spread. It’s already popped up in a number of countries, including our own, typically via airline flights from affected areas of China. That’s something that world health officials are trying to tighten up on even as I type today’s Wall Street commentary. But Wall Street, at least, is already reacting as if, in that classic old movie line, “We’re all gonna die!” Except that in the wonderful world of stocks, it’s the stocks of those companies likely to be severely affected by any pandemic that will die, at least in the short term. So we need to prepare. Particularly, those among us who are Year of the Rat rats, since we're entrepreneurial, frugal, and adaptable leaders in culture and everything else. **
More on pin action in related stock sectors
As I noted in an earlier column, there’s a ripple effect, pin action if you will, when analysts and investors try to figure out just which companies – and their shares – could get seriously clobbered if things get worse on the coronavirus front. First, of course, any companies that have anything to do with international travel would get hit. And they already are. Airlines, hotels, rental car companies got hit first. Followed, logically, by energy companies – specifically those involved in oil and gas. Canceled flights and rental car agreements mean less fuel purchased. Then, maybe travel-oriented companies like credit cards, cruise lines, amusement parks and so forth get hit next. And maybe entertainment venues where large numbers of people typically congregate. Like theme parks, concert halls, movie and live drama theaters. Just use your imagination. The ripple effect could grow. And that’s what already put Wall Street into a kind of low-grade panic last week. Even before we kicked of the Year of the Rat. ##### The good, the bad, and the ugly
Problem is, stocks are ripe for a correction at this point and all they needed was a catalyst. And I think the coronavirus scare might be it. After all, we also had loads of good news recently, too. As in the “Phase I” US-China trade deal, and the passage in the Senate of the USMCA deal, slated to be signed into law this week by President Trump. Getting both at roughly the same time strikes me as pretty bullish. And the Chinese deal, signed as it was as the Chinese Year of the Rat loomed ever closer, should be a good omen for 2020. But, if the market proves toppy, as it does right now, the bad news – coronavirus – will drive the good news out. Every time. So we just need to figure out how bad things will get before the latest Big Scare outlives its headline usefulness. Frankly, I don’t know. And neither does anyone else. Things could work out okay. Or they could get ugly. Fast. (See chart below.) No one knows. ~~~
McClellan Oscillator not looking so hot as of COB Friday, Jan. 24. Chart courtesy Stockcharts.com.
~~~ So I’ve been slowly bailing out of positions that have gotten weak for no apparent reason – like a modest position in drug giant Abbvie (trading symbol: ABBV). I've also sold another modest position in JP Morgan Chase (JPM), since financial companies also got clobbered in this mess. Energy? Our portfolios are low in energy stocks, so few worries there. ##### Buying protection in a negative market
And finally, for protection, I bought a few shares of the double-short S&P 500 ETF, symbol SDS. (Love that symbol.) If things get bad, I can amp this position up some more to protect positions I don’t feel like selling because I like the dividends these stocks pay. Otherwise, the best investing advice I can think of for the coming week is like what your physician prescribes if he thinks you have prostate cancer: “Watchful Waiting.” Some consolation, eh? Stay tuned. ##### Rebalancing in Wells Fargo indexes could cause distortions in some stocks and related ETFs
On other fronts, there’s at least one other subtle item that could make trading even weirder early this week, according to Tim McPartland over at your preferred stock information center, aka, Innovative Income Investor.
“Early next week (Monday the 27th) we will see ‘rebalancing’ announcements being made by Wells Fargo on a number of Indexes….
“…the announcement will be made Monday with actual rebalancing occurring on the next Monday (2/3).
“Many ETFs track these indexes and I randomly checked a few of them and there is sizable potential volume that could occur in many issues–whether it is orderly or not is anyone’s guess. There may be issues ‘dumped’ that would allow a few issues to be picked up at more bargain prices. We will wait and see what happens.”
We should all watch for this announcement and react accordingly if and when it makes sense. Obviously, when a stock is removed from a major index, ETFs will sell it off, since they now have to replace it with one or more new ones that get added. Likewise, the new additions could get a big boost in purchase orders, even if the coronavirus scare is still clobbering the rest of the market. We often find good trades in these situations. ##### Is it time for Wall Street to Rue Britannia?
Finally, over the next week or so, those with positions in UK or Eurozone stocks may Rue Britannia over the next few trading days. That’s because Brexit is absolutely, totally official now, stamped as such by a once-reluctant Parliament as Breitbart reports.
“The withdrawal agreement bill has been given Royal Assent, meaning it has become law and the UK will officially leave the EU on January 31st, 2020.”
‘Twill be a brave new world indeed. And at least some UK and Eurozone stocks may get clobbered accordingly and in fairly short order. Investors large and small love “certain certainties” as T.S. Eliot once wrote. Leaving the Eurozone will prove to be an excellent adventure one way or another. But a lot of investors, big and small alike, might just bail anyway, just for the sheer hell of it. That could be smart, or it could be dumb. But nobody will know what the real answer is for quite some time. But I think it could ultimately prove bullish for the Brits. And for the US as well. It could also mark the blessed end of where globalism and its Euro-elite champions seemed to be taking us. Except for the globalists, Wall Street could like that a lot. 2020 could turn out to be a bullish Year of the Rat after all. Like I said before, stay tuned.
*– Headline image: According to the Chinese calendar, 2020 specifically is the year of the Metal rat. In Chinese philosophy, such a year is associated with material success, well-being and wealth. Screen grab from moving YouTube video image.*