The Market Is About To Plunge (Day 2, Volume 2)
Yesterday, I highlighted the reason for this series. We are celebrating the remaining few days (weeks) at this elevated level in the stock market before the reality of "Sell in May and go away" sinks in leaving bulls despondent as the S&P slides back into the mid-700s. Already, the market has slid significantly since the inception of this series yesterday morning. Will the rally that began at the metaphorical 666 end at the equally numerical 888? The answer appears to be yes, though the deluded bulls may try to argue otherwise.
Today's reason to justify the argument that we are near, at, or past a top in the market: swine flu. Actually, since the WHO renamed it to some forgettable jumble of letters, lets just go back to naming flus the way they are normally named: country of origin. So, what do we know about the Mexican Flu? It is really contagious, yet not very lethal (so far.) No big deal, eh? We'll all get sick but nobody dies. That works. But wait, what if we all get sick at once? See, the flu has been following an exponential growth model where the # of cases is not rising up a linear trendline but instead growing on an exponential curve. As recently as Wednesday night, there were under 10,000 cases of Mexican Flu, but now there are over 16,000 suspected cases (citation). One model I've seen indicates that even with the lethality of the regular flu (0.1% of people contracting the disease die) America will still face great danger. Keep in mind that the normal flu bug only hits ~10% of the population every year whereas this one is infecting 30+% of the people it comes into contact with. Assuming that the disease spreads unhampered (which one must assume unless the government shuts down society thus sending the stock market plunging anyway) 30% of the US population will get the disease. Result: 120 million American cases, ~1.2 million hospitalizations, and 120,000 deaths. Bad. Worse? All of this would come in a short span (a month or two). Result: Hospitals completely overworked, death rate rises due to treatable secondary conditions. Result of this result: Government will quarantine and shut things down. Result of this result: Stock market plunges. I haven't decided if this series will continue over the weekend, but by Monday, Part 3 of this series will examine the fundamental lack of earnings in the S&P 500 and how it impedes any further rally.