Coronavirus cases are surging, and the rout may officially be “on.”
The selling continued today as investors wrapped their heads around new infection records. Florida reported 9,000 confirmed cases on Thursday. Arizona, meanwhile, saw a 5.4% increase, easily surpassing the 2.9% seven-day average gain.
And in Texas, the government has started to roll back reopening measures.
“As I said from the start, if the positivity rate rose above 10%, the State of Texas would take further action to mitigate the spread of COVID-19,” Texas Gov. Greg Abbott said in a press release.
“At this time, it is clear that the rise in cases is largely driven by certain types of activities, including Texans congregating in bars.”
Unsurprisingly, the market recoiled in horror. If lockdowns get put back in place, the “V-shaped” recovery bulls were hoping for could be nothing more than a pipedream.
“Coronavirus cases are spiking and reopenings are being delayed, which at a minimum will impact earnings,” Tom Essaye, founder of The Sevens Report, explained.
“The resurgence in coronavirus cases is raising concerns that the rebound may be short-lived as voluntary or potentially more government-mandated economic shutdowns are becoming increasingly likely.”
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Worse yet was the Fed’s annual bank stress test, conducted after the market closed on Thursday. The Fed discovered that several banks could get close to their minimum capital requirements thanks to downdrafts from the Covid-19 pandemic.
The Fed is forcing banks to cap dividend payments and suspend share repurchases for Q3 in response. Wells Fargo and Capital One might even have to cut their dividends due to the new restrictions.
Short-term, the situation looks grim. And when you extend the market’s outlook, investors could be in for even more pain – something that Disney (NYSE: DIS) shareholders might need to brace for in July and August.
In the weekly (not daily) candlestick chart above, you can see that DIS has approached a nearly ideal short setup. The stock peaked in early June, setting a lower high relative to its pre-coronavirus high, and now occupies dangerous territory.
This week, DIS fell beneath both the 10-week moving average and its bullish trend (represented with the trendline in yellow).
Should DIS trade below this week’s low, it might make sense to take the stock short with a trade trigger of $107.56.
From there, an encounter with the lower Bollinger Band (BB) seems likely.
But even if DIS doesn’t make it that far, short-term bears could still rack up some handsome profits.
All while the rest of the market continues its battle with Covid-19 and economic uncertainty.