The Patient is Starting to Respond

Download PDF VersionMarket Watch – August 7, 2020


“It is only through the relentless management of risk based on arithmetic metrics in which investors can continually triumph over EMOTION and create success and longevity…” 

Ben Graham, the father of securities analysis, in 1946


Bottom Line: Equity trends are positive, but questions as to its underlying health remain. As such we will continue to hold allocations to US treasuries and gold in client accounts, positions that are outperforming stocks, and should continue to act as defense if the market corrects.


In The Markets

Our long term internal measures of market health continue to lack some conviction. The patient is up and running about, but we still have concerns about his internal strength. Someone said to me once that we’ll never have everything perfectly lined up, and that is true. But to sound like a broken clock, if most of his coronary arteries have 60-70% blockage, a doctor would have a hard time releasing the patient.


What in the world am I talking about?



In the table above we show the S&P500 in the top pane and two Buying Pressure Indices (BPI) In the first BPI we can see there is less than at the June highs. BPI 2, we see what I term anemic Buying Power.

Merriam Webster defines anemic as lacking force, vitality, or spirit. That is exactly the issue here. One can claim that it is consistently positive, which is true, it’s just that at this stage of the rally we historically have seen higher levels of buying power.

The current picture

As of August 6, the S&P 500 is about 1% from its high. At the same time, only 16% of the stocks in the index are closer to their own previous highs than the index itself. This is the fewest since February.

The median stock in the S&P500 is still 14% below its peak. There is room for the index to catch down or average stock to catch up. Normal corrections are healthy, but normal corrections come in primary up trends, which we are having difficulty calling this.


Consider this chart.

It shows that after the bears in 2003, 2009 and 2016, the number of stocks hitting new highs (top pane) expanded in massive clusters in the early stages of the following multi year moves higher. We have yet to see that here causing some to believe that this is still not yet a bull market, despite being near all time highs.



Now, all these are not signals per se, but just warnings to monitor all indicators for the first signs of a change in the medium term from up to down. After all, we don’t make money investing in indicators, but in the stocks that are going up, and there have been enough to do so, which we are. We are just making sure that we are dancing with our partner but making sure we are dancing near the exits.


What now then?

There are times to be fully invested, like we were in April/May, and there are times to be more cautious. There are certainly some opportunities that keep us excited here, but we want to hold our exposure to bonds for now as well.

The majority of trends since late March are up and the short-term breakouts are holding. In addition, participation in July is not as strong as it was in June. This is detailed in the Buying Power Index 1 above.

Low Buying Power is not outright bearish, but we should be vigilant because the weakest two months of the year are here (August and September). The chart below built by Arthur Hill, shows monthly seasonal patterns since 1950 (histogram) and current performance (blue line). February, August and September are red, and the weakest three months historically. July is positive. Seasonal considerations are a lower level consideration for us that just add color to the data we are seeing. Every year is its own year and will do its own thing, regardless of historical seasonal patterns. Considering other factors we are seeing however, I find it useful to consider.




Much of our work is an effort to determine the primary trend in the stock market to help us guide how much of your, and our, money we want to allocate there. Right now, when weighing all the data the message is very mixed.

Our Primary Trend Indicator remains positive but safe havens like bonds are outperforming the stock market.

The point is that price is king and we have to lean into the up trend with stocks while keeping hedging activity elevated. That includes not being fully invested in stocks by keeping some bond exposure and keeping our stop losses tighter.

I suspect there is deeper damage, permanent damage to the pre-COVID economy which has not likely been fully realized. Just look at Victoria, BC for example which seems certain to lose a lot of employment at least in the hospitality industry as the year unfolds. But the room for innovation in post-COVID economy may also not have been fully realized.

We remain completely open to any eventuality that the markets bring. Our strategies, tactics and tools will help us to successfully navigate whatever happens as we focus on monitoring supply and demand signals that the market provides us.

Have a very good weekend and we’ll be in touch with you soon.


Peter Schenk, CMT, CIM | Portfolio Manager


Words we operate by:


“Deliver to the world what you would buy if you were on the other end. There is huge pleasure in life to be obtained from getting deserved trust. The way to get it is to deliver what you would want to see if you were on the other end.”
-Charlie Munger

 “Strive not to be a success, but rather to be of value.”
-Albert Einstein



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