Download pdf version – Market Watch – Confirmed Uptrend – October 18, 2020
“Increased borrowing must be matched by increased ability to repay. Otherwise we aren’t expanding the economy, we’re merely puffing it up.” — Henry C. Alexander
Bottom Line: The September correction in stocks was orderly, and the weight of evidence now suggests that odds are positive for more upside in stocks into year end.
Big Picture: In recent updates we’ve touched on the effect that Central Banks are having on financial markets and asset prices. In our most recent Market Watch, All Systems Go, we included a chart of M1 money supply to show visually the increased liquidity that is contributing to asset price inflation.
This week, Ned Davis Research produced a chart of M2, which is M1 plus savings deposits, money market securities, mutual funds, and other time deposits.
The point for you and me is that M2 is closely watched as an indicator of money supply and future inflation, and as a target of central bank monetary policy. In the NDR chart on page 2 you can see the spike in M2 this year. Of course, the problem with the Fed’s easy money policies is that they cannot control where the money goes and much of it has gone into asset inflation.
It is our view at the Schenk Wealth Management that while the rate of money supply growth may not keep up this breakneck speed, the Fed is in this game for the long run now. All else being equal, this should be bullish for stocks and our retirement accounts, despite probable higher volatility.
In The Markets: Classic chart patterns that worked in the early 1900’s continue to work today. This is because human behaviour never seems to change. While we do not rely on chart patterns as a primary tool in our Trending Value Portfolio System, they can be helpful when weighed against the major market drivers that we cover in The Raps Sheet.
There are few things as classic as a cup and handle pattern. These occur when the underlying asset forms a chart that resembles a cup in the shape of a U, and a handle represented by a slight downward trend after the cup.
The shape is formed when there’s a price wave down, which is then followed by a stabilization period, followed again by a rally of approximately the same size as the prior trend. This price action is what forms the identifying cup and handle shape and volume often declines on the handle indicating a reduction of selling pressure.
William O’Neil initially recognized this popular stock chart pattern in 1988. The handle will remain close to the prior highs, which will squeeze out the short-sellers and cause new buyers to enter the market.
Over the last few weeks, many leading growth companies have formed these patterns or something close. Indeed, the Nasdaq index and the S&P500 are forming a cup-with-handle in mid-October (Nasdaq shown below) despite the headline uncertainty of the “Covid economy” and the upcoming US Presidential election. This just ahead of the historically bullish Nov/Dec/Jan period. Underneath all the drama seems business as usual.
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.
I hope you had a very good weekend. If you have any questions about this update, or anything else please do not hesitate to reach out.
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.”
“Strive not to be a success, but rather to be of value.”