Monday’s selloff was fast. It was furious.
And it was the one we’ve been expecting for a few weeks.
On Tuesday, we had a bit of a relief rally. All those worries about inflation dissipated for a few hours. All those threats about stretched company valuations vanished.
Traders also set aside fears about COVID-19.
That latter factor requires greater reflection. With the threat of COVID-19 impacting investor sentiment and the broader economy, I want to remind you about how to manage your money now.
Let’s dive in.
The Return of COVID-19
Let me ask you an honest question.
While the market melted Monday, did you miss the threat that China made to Japan?
In case you did miss it, China threatened to hit Japan with a nuclear strike. That’s right. Chinese officials approved a video that said the nation would attack its neighbor if Japan interfered in China’s quest to reunite Taiwan.
At any time before COVID-19, such a threat would have fueled a massive selloff in the market.
We experienced several big drops after North Korea threatened to blow individual ships out of the water.
But the world’s second-largest economy threatens to blow up the world’s third-largest economy?
People barely noticed.
It was a sign of how self-centered investors are about the state of the U.S. economy. There are worries about inflation. There are concerns about valuations. And now we have to deal with the ongoing surge of the delta variant.
The latest COVID-19 numbers are serious. We experienced a 50% increase in COVID-19 cases across the nation in the space of a week. Fatalities from COVID-19 increased by about 48% to an average of 239 per day. Roughly 83% of all new cases are from the delta strain.
It’s not just people who are unvaccinated who have caught this strain of the virus. But it’s very concerning that so many Americans have avoided the vaccine over the last year. According to the CDC, about two-thirds of all counties in the United States have vaccination rates under 40%. Across the U.S., as of July 19, 56.3% of Americans had received at least one dose and 48.9% were fully vaccinated.
Within the next two weeks, we could see an even greater surge in the number of cases.
And it’s important to note that even if we don’t see new shutdowns or restrictions, this will harm market sentiment.
What to Do With COVID-19 Stocks?
On Monday, we saw speculators pile into several different stocks that were winners after the outbreak and ensuing shutdown in March 2020.
Investors piled into vaccine stocks, blood testing and diagnostic stocks, and those at-home stocks that would benefit if more Americans had to work from home during a third wave of COVID-19.
But on Tuesday, those same stocks plunged.
This is an important lesson.
Take Lakeland Industries (LAKE), for example.
The company is a manufacturer of protective clothing, masks, and other safety products.
Before the first wave of COVID-19, shares traded for under $11 apiece.
But at the onset of the COVID-19 outbreak, shares steadily charged higher. Shares climbed as high as $47.95 this past February as speculators continued to press the stock higher and higher.
Since then, shares have collapsed. From February to early July, the stock plunged from 52-week highs to under $22 last Tuesday.
On Monday, however, traders piled in on speculation about the third wave.
Then, they sold the stock off to other investors looking to pile in and speculate as well.
Shares fell by more than 6.5% on Tuesday.
This is what happens in a very choppy market. We see head fakes happen.
But anyone who used TradeSmith Finance would know that Lakeland Industries was a stock to avoid. Lakeland hit its trailing stop back on March 23, 2021. It is currently in the Red Zone, which means it’s not a stock to buy.
In addition, the stock has been locked in a side trend. That means momentum has effectively stalled. So, the pop you saw on Monday was heavy speculation. A lot of day traders took advantage of the Monday pop and likely exited on Tuesday.
The reason I bring up the side trend is because of our Smart Moving Average. Stocks that lack an uptrend in momentum are not experiencing a strong price trend and are likely not attracting a wave of institutional capital.
Does that mean that you should avoid Lakeland? Right now, absolutely.
But if the stock does start to see consistent gains and an uptrend in momentum, it will be a company to buy. We’re still in the early days of determining how the market will react to the latest wave of COVID-19. Be sure to avoid speculating on stocks that aren’t “buys” or that lack positive momentum.
I’ll be back tomorrow to discuss how to trade Bitcoin and other cryptocurrencies.
And I’m also working on a special report on how to protect ourselves if we experience a significant market selloff in the weeks ahead.