Over the near-term, it’s worth staying defensive in the stock market because it still needs time to repair the recent technical damage, but I wouldn’t get too negative. The coronavirus numbers will likely continue higher but that doesn’t mean the stock market has to go lower. In other words, the stock market is a discounting mechanism. It trades on what will happen 6-9 months from now.
The big question on everyone’s mind is “has the stock market already priced in the upcoming slowdown in the economy?” Of course no one knows for sure, but here are four reasons I remain positive on this market.
The number one factor I use to judge the health of the market is the price action of leading stocks. While many growth stocks still need time to build proper technical bases, I’m encouraged by the strength I’m seeing. Before this correction started, the leading growth sectors were software, biotech, semiconductors and medical products. Over the past week, many stocks from these sectors recovered well and are already close to new highs. I need to stress that patience is still required before one can aggressively get back into growth stocks, but the recent price action is constructive and a small step in the right direction.
In my early trading days, I would get discouraged during market corrections. As I matured in my trading career, I’ve learned to embrace corrections because I know the type of explosive moves growth stocks can make when we get a confirmed bottom. The pressure of the market is keeping these stocks down and once a little tension is relieved, many stocks can see rapid gains of 50% or more. Again, it will require patience before this happens but the chart below explains my optimism. It shows the strong gains that were made in growth stocks coming out of the four month “Flash Crash” correction in 2010.