“Narcissism is alive and well, humility is around the corner”
-Me (written on February 28th, 2020)
The markets have chosen to continue a consolidating trend
that began at the beginning of the month. The measures that most attentive
investors tend to, such as technical and fundamental avenues of analysis, were
showing a market overbought and too dependent of unforeseen economic
challenges. I bring this up because I’m a lifelong advocate of using technical
analysis as a means of determining the probable outcome of an index given a
particular formation. In short, I know when a market is overbought, but I never
know what’s going to take it down. That’s when cash comes in handy.
The Markets
Even with today’s 2.59% decline in the S&P 500,
modest compared to last week 7% decline, there has yet to appear a reasonable
change in attitude. Indexes, except the NASDAQ, are still down for the year and
a commonly observed indicator called the VIX (Volatility index) remained at
levels that the past few year suggested further to go in the rally. I don’t
necessarily disagree with those observations, but the uncertainties that
surround corrections are still worth paying attention to, especially the form
they take. For example, Europe has been showing some measurable vigor this
month following last months stimulus package. And with the exception of a few
unsurprising blunders from Washington, Phase 1 of the China trade deal remains
intact. These are good indicators, yet those markets have joined in this month’s
retracement, and that brings us to the pandemic and the realities of reopening
of economy.
The Economy
The world economies have all been making attempts to
strategize a reopening of their respective economies. Aware of the health
dangers involved, the process was on the heels of both stimulus and recent
declines in cases of the virus. But also followed by positive economic data
beginning with the unexpected increase in private sector payrolls. This
was followed by brave attempts of the Fed to stay the course, then a 17.7% rise
in Retail Sales, Industrial Production increased 1.4% and the interesting
release was Housing Starts, which rose 4.3%. Housing Starts is an interesting
piece of data, because the positive trend is rebounding from levels that are
still down 23% for the past 12 months. But with New Building Permits also
strongly increasing 14.4% the cause becomes clearer. There is statistical
evidence from the National Association of Realters that people are moving from
the cities, accelerated by protests, but also by the need for more desirable
living space. All in all it seems that there were genuine pockets of strength
appearing the economy, but then the pandemic returns. In my opinion, the
massive movement of people cross state, protests, political rallies, reopening
and the like, as well as a surge in national testing, have all have contributed
to the increase in new cases of the virus. Next month it will take some
continuity of data to reassure investors, for now the best strategy is to let
the 2nd Quarter finish out and new information about the economy and
business enter the narrative.
External Events
I’m not surprised by so much social activity taking place
in the country, counter to more passive sectors the population. It is after all
an election year and it’s going to take a lot of patience to get through the
dense rhetoric of the politicians and the media. And while the markets can
easily ignore those disruptions, the pandemic, and the uptick in new cases,
shouldn’t be ignored. But in my opinion that’s because both are mutually
exclusive, namely I choose to listen to the scientists, not journalists, and
the technical analysts, not the economists, and most of all try to listen to
only those, like us, who have skin in game. Its surprising how much can come
from those resources.
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