Download PDF Version – Market Watch – August 15, 2020
Our Fundamental View
The stock market is a leading economic indicator and its advance from the March lows has been impressive. The market also shows what investors are willing to pay for stocks relative to the economy, and it is rather expensive today. Forecasters and advisors are relatively bullish on the economy as a group, so it’s always good to keep in mind one of the most important lessons the market has to offer: there is nothing like price to change sentiment. For now, when professional investment advisors as a crowd are over 69% bullish (as a percent of bulls and bears), the market has historically struggled.
Both retail sales and production posted smaller gains in July than in June, but a recovery is still in place. Consumer sentiment is rather flat in August, which could hold back spending growth. I still believe there will have to be a further economic impact from high unemployment levels after the effects of government “stimulus” wears off.
Investors are currently willing to pay near record prices for earnings. I realize that earnings are depressed by the recession, but investors must be looking for a V-shaped recovery.
The question becomes, “Will central bank liquidity be able to overcome any of these negatives on the economy, especially when it comes to expensive stock markets?” Our Primary Trend Indicator and Buying Power models should help warn us.
Our Technical View
From a purely technical perspective, Mr. Market’s behaviour is constructive. As we are in the seasonally weaker May-Oct (and worse Aug/Sept) period, hanging around the highs is rather impressive. I would have expected bigger pullbacks by now. There is still time in the weak season, and the US election looms so we’ll remain cautious.
The S&P tried this week to hit highs on both Wednesday and Thursday before closing both days below. It might take some kind of positive news to push it through, but this is very normal. Hanging around the highs is generally a positive thing. Mr. Market will often do this at key levels to see who wants an excuse to sell.
Below is a long-term weekly chart of the S&P 500 ETF (SPY) which is in a medium-term uptrend. Our Primary Trend Indicator remains positive and the Buying Power models we run have also improved and may turn positive soon. Participation broadened as the patient long term symptoms have begun to respond to the doctor’s medication (central bank liquidity injections).
Gold and US treasuries (both positions in our portfolios) fell into oversold territory this last week putting them at interesting junctures: long-term uptrends and short-term oversold. For now, weight of the evidence for stocks and gold remains positive, normal corrections notwithstanding.
Our biggest worry was with the 10-yr US Treasury Note. Extremely low and falling rates are a strong signal of deflation. When it broke 1.50% in February falling to roughly 0.50% was not good news. They’ve held that level and this last week have actually started to rise which is generally a positive for stocks. Further upside in interest rates in the coming weeks would continue to dispel worries of a depression like outcome, and likely put a wind at the back of the market.
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.
CMT, CIM | Portfolio Manager
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