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Another market force is taking over for Wall Street's record-rally 'FOMO'

VIDEO5:4205:42
Another market-moving force is taking over for 'FOMO'—here's how to manage it

Step aside, FOMO.

There's a new market-moving force on Wall Street that's trumping investors' "fear of missing out" on the record rally, one that left the major averages in the red on Friday with their first weekly losses in nearly a month, says Craig Johnson, senior technical research analyst at Piper Sandler.

Until recently, even with the coronavirus outbreak stoking fear with global investors, "We've been seeing equities rallying and some stocks going parabolic out there," Johnson said Friday on CNBC's "Trading Nation."

"But with the recent sell-off we're seeing, now it looks like a market that's going into 'FOCO,' which is the fear of the corona[virus] outbreak," he said.

Johnson pointed to a chart comparing the S&P 500's performance in the last two years with that of the Cboe Volatility Index, more commonly referred to as the VIX or the stock market's "fear gauge."

When the VIX begins to break above its 200-day moving average — identified in purple on the chart below — it tends to indicate that investors are "going into a bit of a risk-off mode," the analyst said. The S&P's weakness during those times seems to reflect that as well.

"That's exactly what we're seeing right now," Johnson said. "Couple that together with our longer-term measures of market breadth that ... issued a sell signal just a few weeks ago, and this is a market that's setting up, perhaps, to be using the coronavirus fears as a reason to be taking some profits in here, at least short term."

On Friday, the key level Johnson was watching in the S&P was 3,720, roughly the level of the index's 50-day moving average. He saw that level as a floor of support, adding "we would buy the dip" if the S&P were to fall that far. The S&P ended trading down more than 1% on Friday, at 3,337.75.

Steve Chiavarone, an equity strategist, portfolio manager and vice president at Federated Hermes, said that while he didn't want to diminish the seriousness of the lives lost to the coronavirus, he didn't see the market impact lasting very long.

"From an economic perspective, our view is that viruses, natural disasters, government shutdowns, Boeing shutdowns, for that matter, ... represent demand deferred, not demand destroyed, meaning that if corona disrupts the supply chain around the iPhone and the iPhone doesn't come out in September, but it comes out in December, people are not going to not buy it. They're just going to buy it later," Chiavarone said in the same "Trading Nation" interview.

Earnings and economic growth may be dented in the short term, he said, but he doesn't expect the coronavirus to be the story of the market in 2020.

"We think what you're dealing with is going to be a first half that's going to be on the weaker side from corona[virus], from Boeing, but we think that the second half is going to be a kind of V-shaped recovery," the strategist said.

With the U.S. consumer strong, interest rates low and the Federal Reserve's 2019 stimulus "filtering through" the U.S. economy, the underlying growth drivers are still in place to sustain a second-half recovery, Chiavarone said.

"What we would suggest for investors is when you look at parts of the market — particularly the cyclicals — where you've really got names that are getting beat up because maybe they're tied to tourism or trade or supply chains, start to bargain hunt," he said. "Start to look for opportunities there because we think once the economy rebounds in the second half, those names are going to rebound pretty strongly."

While Johnson maintained that, for tactical investors, "it's time to take some profits" in the near term, he agreed with Chiavarone on the long-term outlook.

"We still have a 3,600 year-end price objective" for the S&P, he said. "But, in the near term, ... whether this is a V-shaped bottom or a U-shaped bottom here for the coronavirus, it's going to be a little [un]settling for investors until they understand where those earnings estimates go."

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