The coronavirus has been quickly spreading across the world with a handful of deaths reported in China. So far, Asian financial markets have been wobbly with the Chinese stock market (FXI  ) about 5% lower. This is not surprising given the negative effect that such an outbreak will have on travel and consumption. There could also be knock-on effects like the U.S. hotel and travel industry being negatively damaged due to reduced Asian tourists visiting.

These events are difficult for financial markets and traders to process due to uncertainty especially in real-time, but it can be helpful to look at past events as a guide. In 1997, the avian flu virus temporarily hit markets which fell as much as 3% but quickly recovered as the flu was contained, and stocks were amid a powerful uptrend. In 2003, SARS began to infect thousands of people in Asia and sent Asian markets more than 10% lower. Again, this proved to be a buying opportunity as the outbreak was contained, and the market's bullish trend asserted itself.

Market Tells

Overall, those outbreaks caused short-term panic-driven selling but did not materially affect economic activity. Some interesting stocks to watch in the coming weeks are casino stocks with exposure to Macau like Las Vegas Sands (LVS  ) and Wynn Resorts (WYNN  ). Another important sector is the Chinese regional airline stocks like China South Airlines (ZNH  ) and China Eastern Airlines (CEA  ).

Both airline stocks are down nearly 20%, while the casino stocks are down 5%. These sectors would be most immediately affected by the outbreak getting worse and leading to more drastic freezes on travel.

Trade Ideas

Lakeland Industries (LAKE  ) sells protective clothing and equipment that is worn by medical professionals in these specific cases to prevent an infectious outbreak. Its stock is up more than 25% in the past week, and further gains are possible given the possible demand shock especially with the disease being diagnosed in Western countries in recent days.

BioCryst Pharmaceuticals (BCRX  ) has a drug in development currently in Phase 1 that is supposed to be a vaccine for a range of viruses including coronavirus. Since it's in Phase 1, approval is not going to happen soon, but it bears watching going forward. In a perverse sense, the stock could see hefty gains if the outbreak gets worse, as the profit potential of BioCryst's treatment would increase.