Further comments about Swine Flu and Markets

First off, I wasn't accurate about what I said regarding the outbreak of SARS and the performance of the markets. The first reported case of SARS occured in November 2002 and you can see by the chart below how the market fared from the beginning through to the end of the SARS outbreak.




From what I recalled from memory, the SARS outbreak was a 2003 phenomenon...it just goes to show that you should never believe a word I say. Did SARS cause the market to decline or was it coincidental? I strongly feel it’s the latter. I doubt SARS was even significant enough for the market to acknowledge and even if it was, these sorts of external shocks will not have a lasting effect on financial markets unless the financial consequences are both severe and prolonged and the market tends to do a good job dicounting this right away. Even events such as a presidential assassination or a terrorist attack will do little to derail the ongoing trend that was in place aside from potentially sharp but short term weakness that will be recuperated fairly quickly. The Kennedy assassination for example occured during a strong bull market and it caused the Dow to drop about 3%. This was then quickly recovered within a week as the markets went on to soar to new highs in the months ahead.

911 was an exception to this rule because a) it was so unthinkable for something like this to have occurred in the US and b) the market was in the midst of a severe bear market and this event simply accelerated the downtrend already in place in September. Had the market been in bull mode, the damage would have been less severe I'm sure. Keep in mind that 3 months later, not only did the market recoup all the severe losses that 911 inflicted but it also added gains and this was in the midst of a severe bear market that had yet to have seen its final low. Thus, I'm convinced that had 911 not occurred, the market would have made a bottom sometime in Sept/Oct and staged a big rally after that point….but I digress.

Let’s face it though…. outbreaks such as the Swine Flu are not bullish events to say the least. The "alarm level" as it is called, has just been raised to 4 one step below pandemic level which would label the outbreak as quite serious given there is currently no vaccine for the virus. Therefore, given the fragility of the economy something like this is not a welcomed event. But if the prospects for an economic recovery are real and the market smells an immanent recovery, I’m sure the swine flu will be ignored unless it becomes so serious that it makes everyone want to wear a mask when leaving the house.

Regarding the short term…..I think we will see some more weakness in the market this week before any serious strength. SPX 840-845 may very well be reached. I don't know if this happens tomorrow or perhaps Wednesday...we'll see. I'm taking things 1 day at a time.

I also forgot to mention that I dumped my TBT calls today for a decent gain of 25%. I intend to buy calls again with the proceeds but at a higher strike on a dip. This is a way of pyramiding into a position.