Technical analysis is a phenomenon that tells one when to be cautious, but not why. When it’s flags an oversold condition, it tell us to be attentive, but alas, we don’t know why. For example, the markets were overbought in February and we were cautious. Then the pandemic hit, and the indexes dropped over 30% in three weeks. I didn’t know that would be the reason, did you? Welcome to the markets today.
The overall technically overbought condition of the broad markets took another step higher this week and the condition didn’t go unnoticed. But the first defense was the continued rotation out of pre Covid investments into post Covid investments in sectors such as Energy and Food & Leisure. The second defense was the impending probability of a stimulus package being approved. The third defense was the long-awaited price pickup in foreign equity markets, most notably in Germany and Japan both reaching historic highs this week. The overall logic being these markets and sectors represent deeply underperforming valuations due to the pandemic and the growing optimism over the discovery of a vaccine changes the picture in no small way. All a lot to take in and distribute when the time comes. For now, market declines are used to average cost holdings all of which are met with concurrent sales to maintain a healthy cash position for new opportunities. When those opportunities will be plentiful, I don’t know, and neither does anyone else.
The economy continues to moderate in tandem with the uptick in Covid cases. New discussion of lockdowns and its impact on the already struggling brick and mortar small business compels a renewal of the same stimulus feature used in last spring’s Care Act. An opinion that by all appearances is widely accepted. In the meantime, both ISM Manufacturing and Non-Manufacturing data declined but remained above 50, which suggests expansion is still intact. Today the Unemployment data was released by the Bureau of Labor showing Non-Farm Payrolls increased by 245,000 and the Unemployment Rate declined to 6.7% from 6.9%. Curiously, the narrative was one of disappointment suggesting that missing the expectations of a higher payroll number was worth considering, which I don’t agree with. I say this because the pandemic has made a mess out of economic data as another stimulus package likely to emerge in addition to any signs of Covid cases moderating have to be taken into consideration too. Next week Mortgage Application and Inventory Data should give reasonable insight into the breadth of moderation in the economy as those areas have been good indicators of consumer strength. And as I like to point out, the consumer rules the world, like it or not.
As the dilemma infringing on the impending outcome of the recent elections continues, the distraction is good enough for the global markets to ignore. But it also creates a distraction of other events that, in my opinion, are of equal importance. As the European market’s wakeup from their Covid slowdown so too the politicians and their aggressive push against big tech. Just as the post financial crisis in this country justified the nearly extortive legislation against the banks the European move is typical of creating revenue to feed their government program laden balance sheets. I wouldn’t be surprised to see similar legislation is this country from the new administration as more government programs are introduced and capital is short on hand. Either way these conditions are neither new to the taxpayer nor the investor, and that could be the trigger the helps relieve overbought market conditions and worthy of paying attention to.