Rally Pauses as Coronavirus Spreads to U.S.

The spread of the mysterious, flu-like, coronavirus to U.S. shores was enough to knock the major indices off of their record-setting run on Tuesday. However, stocks still showed a lot of resiliency, especially compared to Asian markets.

The S&P dipped 0.27% to 3320.79, while the NASDAQ was off 0.19% (or about 18 points) to 9370.81.

The worst performance came from the Dow, which dropped 0.52% (or a little more than 150 points) to 29,196.04. But you can’t put all the blame for that dip on the coronavirus… or even most of the blame!

The biggest cause for the index’s pullback was Boeing, which dipped another 3.3% as the company doesn’t expect regulators to clear the 737 Max until midway through 2020. That’s months behind schedule and is just the latest setback in the ongoing drama for the beleaguered aerospace giant.

So is the market really scared of this virus out of China? In a way it is, as evidenced by the sharp drops on Tuesday for airline and casino stocks. Hundreds of cases and six deaths overseas is nothing to ignore.

But there was no panic in the major indices during the session. For now, it appears the news was just an excuse to pull back the reins a bit on a hot market.

Remember, when last we met before the three-day weekend, the major indices had just put together another round of all-time highs based on a couple trade deals, a solid start to earnings season and some good economic data.

In fact, the NASDAQ entered today with a six-week winning streak, while the other two have gone back-to-back.

Of course, all bets are off if the coronavirus turns out to be more serious than expected. The World Health Organization has an emergency meeting tomorrow to discuss the situation.

Meanwhile, earnings season resumes after a pretty decent start last week from the big banks. The big report on Tuesday was Netflix, but it didn’t come until after the bell.

The streaming pioneer, which received more Academy Award nominations (24) than any other studio last week, offered a soft guidance as it starts to feel the pinch of increased competition from the likes of Disney and Apple, among several others.

However, the first FAANG stock to report still added 8.8 million net global subscribers, even if the U.S. came in a bit light.

As of this writing, shares of NFLX are up 2% afterhours, recovering from an initial move lower. Also, IBM shares are up about 4% right now, afterhours, thanks to breaking its streak of five quarters with revenue declines.

Today's Portfolio Highlights:

Stocks Under $10: The portfolio made several moves on Tuesday, including selling the underperforming Air Industries Group (AIRI) and replacing it with Aspen Group (ASPU). This Zacks Rank #1 (Strong Buy) is an Internet services company with shrinking losses and “outstanding” topline growth. Brian thinks this stock could become profitable in the next few quarters.

The editor also decided to add a very speculative play that doesn’t even have a Zacks Rank. Alpha Pro Tech (APT) develops, manufactures and markets disposable protective apparel and infection control products. More specifically, they make the masks that we’ve been seeing a lot of folks in China wearing as the coronavirus started to spread. And if it turns out to be even a fraction of what SARS was earlier this century, then we’ll be seeing a lot more of the masks all over the world. The stock was up more than 38% on Tuesday. Remember, this is a speculative short-term play, so make sure to read the complete commentary for more news on this and all other portfolio moves today.

Surprise Trader: Get ready for a new addition every day this week as earnings season revs up. On Tuesday, Dave added Johnson & Johnson (JNJ), which has a positive Earnings ESP of 0.77% for the quarter being reported before the bell tomorrow. The long-term chart shows a strong positive earnings trend for JNJ… and shares of the company have been known to take off on a solid report. The editor added JNJ with a 12.5% allocation. He also sold Delta Air Lines (DAL) for a return of 4.7% in two weeks. Read the full write-up for more on these moves.

Options Trader: The portfolio added calls in Johnson & Johnson (JNJ) and Cerner Corp. (CERN) on Tuesday, which are both Zacks Rank #2s (Buys) with VGMs of “B” from highly-ranked industries. Kevin bought to open 5 July 160.00 Calls in JNJ, which would bring a gain of 515% if it can get above $172 by the mid-July expiration. The company reports tomorrow before the bell, but the editor didn’t want to wait given the potential gain and long timetable.

Meanwhile, Kevin bought to open 2 June 77.50 calls in CERN, which is a healthcare information technology solutions provider. If the stock can get above $101 by the mid-June expiration, this position would bring 571%. The editor isn’t as confident that CERN can pull that off, but it would still be a 114% gain if it could make a “modest” move to $85. Read the full write-up for more specifics on these moves.

Counterstrike: The spreading of Coronavirus does appear to be taking a bite out of the market on Tuesday, especially after the first case of this Chinese flu was reported in the U.S. Jeremy decided to buy a 5% allocation in IPath Series B S&P 500 VIX Short-Term Futures ETN (VXX) as a hedge for a little protection. This fund will make the service money if the VIX advances on fears of further contagion around the world. Read the full write-up for more.

Zacks Short List: The portfolio short-covered Baozun (BZUN) and Occidental Petroleum (OXY) as part of its weekly adjustment today, and replaced these names by adding Cheniere Energy (LNG) and Vertex Pharmaceuticals (VRTX). Learn more about this emotion-free portfolio that takes advantage of falling and volatile markets by reading the Short List Trader Guide.

Black Box Trader: This week’s adjustment, which comes a day late because of yesterday’s holiday, replaced more than half of the portfolio. The seven names that were sold today include:

• Delta Air Lines (DAL, +4.9%)
• The AES Corp. (AES, +2.9%)
• Invesco (IVZ, +2.2%)
• Graphic Packaging (GPK,+0.2%)
• Matador Resources (MTDR)
• Diebold Nixdorf (DBD)
• WPX Energy (WPX)

The new buys that filled these opened spots were:

• Carnival Corp. (CCL)
• Citigroup (C)
• Devon Energy (DVN)
• Morgan Stanley (MS)
• Murphy Oil Corp. (MUR)
• Signet Jewelers (SIG)
• WESCO Int’l (WCC)

Read the Black Box Trader’s Guide to learn more about this computer-driven service designed to take the emotion out of investing.

All the Best,
Jim Giaquinto

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