FREDAlert!
Volume 12, Issue 2
April 17, 2020
The markets are up strong in the night session, on news of a potentially successful drug therapy trial for Coronavirus in the Chicago area. This is the drug from Gilead Sciences (GILD) called Remdesivir that we have mentioned before, which also had some success in Seattle for compassionate use patients. The market is acting as if this is a game changer!
We have had some informal discussions with biologists and friends at CDC here in Atlanta, and the gist of these is that the results are promising but more work on the drug is needed. Remember this drug is a therapeutic for those who have COVID-19 and is not a vaccine. We will need both a therapeutic and a vaccine to put COVID-19 behind us. The fact that Friday is options expiration may have something to do with the overnight rise as well.
The main question we are being asked is whether the advent of this drug obviates a retest of the lows later in the May to July time period, as we have indicated is likely from the technical patterns we have seen thus far. We have an idea that may be helpful in terms of what to look for to help answer this question going forward. Assuming the fundamental reasons for a retest should be either: (1) an economy that is worse than expected going forward, and a deeper recession because of this, or (2) a spike in cases if the economy re-opens too soon. One way to gauge the market’s view of recession risk is to watch small cap indexes, primarily IJR (iShares® Small Cap 600) and IWM (iShares® Russell 2000 Index). Small cap has almost always outperformed as you come out of a recession – look at the performance of these vs. SPY in 2009, 2010 as an example. The better these ETFs perform over the next few weeks, the less likelihood of a really bad economy, and retest, becomes.
