China is the factory to the world. There are now conflicting reports about factory openings in the aftermath of the coronavirus. That matters to the economy and, of course, companies.
It has always been the job of government and companies to spin stories. Perhaps today the same is being done with the coronavirus’ impact.
In our analysis at The Arora Report, the impact of coronavirus on China’s GDP for the first quarter will be at the rate of about 1.5%. China is still the growth engine of the world. It will drag down world growth. Should investors care? Price action in the stock market shows that most investors do not care. Paradoxically, such investors may be right.
The current motto of investors is: “In central banks we trust.” Central banks have shown that they stand ready to put lipstick on everything to drive stock markets higher across the world. What can possibly go wrong? So far it has been a free lunch. Let’s examine with the help of a chart.
Note the following:
• Foxconn, the main Apple AAPL, +0.47% supplier, has received approval to resume production at an important plant in China. There is a report that only 10% of the workforce has managed to return. Investors seem to ignore that problem and are focusing on the plant opening.
• Tesla TSLA, +3.10% has announced that Shanghai will help open its China factory.
• The chart shows a short squeeze that led to the recent high.
• Wall Street positioning is such that another short squeeze can easily occur over the next two weeks. A short squeeze causes artificial buying, resulting in violent moves up.
• The chart shows the strong trendline that was in place since October.
• The chart shows the break of the trendline on coronavirus fears.
• The chart shows a liquidity injection.
• The chart shows a strong rally after the liquidity injection.
• RSI (relative strength index) shows negative divergence. In plain English, it means that even though the stock market has not fallen, the internal momentum is sending a negative signal.
• The chart shows that during the rebound in the stock market, volume has been relatively higher. This indicates that the fear of missing out (FOMO) is stronger than the fear of losing money.
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What does it all mean?
Markets are complex. Many factors other than coronavirus are at play. Investors ought to take a comprehensive look using a comprehensive proven model such as the ZYX Asset Allocation Model.
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. Nigam Arora is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.