Stock Market Panic

Written By Brian Hicks

Posted April 28, 2009

Buy the rumor, sell the news.

That’s why I just went short Novavax (NVAX – NASDAQ).

Here are yesterday’s headlines, verbatim, from the popular "news" website Drudge Report:

    EU: Don’t travel to USA and Mexico…
     US calls EU travel warning unwarranted…
     Russia to check all planes from Americas…
     JANET: NO TESTING OF INCOMING PLANE PASSENGERS…
     STATE DEPT TO ISSUE TRAVEL WARNING TO MEXICO…
     Every passenger arriving in Britain from Mexico screened…
     Has globalization made us more catastrophe-prone?
     ‘NO EVIDENCE’ OF BIO-TERROR…
     PIG SICK: NYC…
     Could mutate to ‘more dangerous’ strain…
     Flu could boost gov’t intervention further…
     Mexico flu scare empties streets, churches, bars…
     Spreads to Europe, markets edgy…

Right now, the world is panicking over confirmation the swine flu is spreading to parts outside of Mexico.

Pandemic is now the buzzword of the day.

And it’s easy to see why. The outcome of a full-blown flu pandemic is a grim scenario. . .

At least two million dead.  

Hospitals turning away thousands of the sick and dying because there a no available beds. Schools closed for weeks. Hundreds of thousands of empty seats at sports stadiums and churches. A market recovery wiped out.

That’s the government’s own assessment. (Not that I put a lot of weight in it. See Iraq and WMD. 🙂 )

But their conclusions, reported by the media, paint a ghoulish picture of what would happen if the swine flu cascades out of control.

According to the report. . .

A full-scale pandemic — if it ever comes — could be expected to claim the lives of about 2 percent of those infected, about 2 million Americans.

The government estimates that a pandemic like the 1918 Spanish flu would sicken 90 million Americans, or about 30 percent of the population. Of those, nearly 10 million would have to be admitted to a hospital, and nearly 1.5 million would need intensive care. About 750,000 would need the help of mechanical ventilators to keep breathing.

So again, it’s easy to see why markets are nervous.

In fact, once the news broke about the spread of swine flu, it produced mini-Black Swans in the biotech sector. (See "Biotechs and Black Swans.")

Investors and traders alike, looking for an easy score, were buying every pharmaceutical and biotech stock that had exposure to a flu vaccine.

  • Gilead Sciences was up nearly $2. . .
  • Glaxo was up nearly $2 too. . .
  • But small biotech Novavax was up more than $1.90 intraday. . . representing a gain of more than 120%.

Check out this chart of Novavax. . .

NOV

I love going short panic buying.

And I think you should too.

Novavax’s "pandemic" flu vaccine is currently in Phase I/IIa clinical trials. It’ll take years before it hits the market. Once the swine flu panic subsides, Novavax’s stock should revert back to the mean.

That’s why I went short Novavax yesterday.

Profitably yours,

Brian Hicks

P.S.  A perfect example of trading the rumor comes from my colleague, Ian Cooper.  He’s just directed his readers to trade the growing momentum behind legalizing online gambling in the U.S.  So far, his readers have pocketed gains of over 20% on two stocks.  And Ian’s confident the news that’s about to break will push these two plays much, much higher.  To get all the details on his two trades, just click here

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