05/18/2020 Our View of the Markets hasn't Changed Much

Dear Participants!

Our view of the markets hasn’t changed much.  We were caught in a dilemma after the 2018 low was broken.  The next obvious level of support was the 2015/2016 lows which were quite a bit lower.  We were waiting to see come clear TRIN and other signals to establish a high level of confidence in a bottom.  When the extraordinary monetary and fiscal commitments were announced, we reached out for further opinions in regard to what effect it might have had.  You may recall that we stated the markets could rally at any time giving their deeply oversold conditions.  

Well, the answers are now in, the oversold markets rallied well above the 2015/2016 lows and have since traced out what appears to be a countertr end rally that appears to have now turned down.  First putting in a bearish head and shoulders pattern in some markets, like the Dow Industrials, over the last two days, stock markets generally have traced out what appears to be a first small impulse wave downs.  But for the policy response, we’d expect an historic waterfall decline of epoch proportions.  This could still happen.  We will see.  With unemployment sky-high, real estate markets appearing to have turned down in earnest, and a robust rally while the economy continues to struggle, we can’t recommend a market bullish or even a market neutral position at this point to say the least.

One of the Subadvisors we utilize from time to time, wrote to me the following:  “Yes. This is the second leg [down] I was talking about. Now we will hear the fear in Powell’s [the Fed Chairman’s] speeches and more layoffs and loan losses and higher unemployment which money can’t fix.” 

As we’ve said many times, don’t wholly abandon a long term view.  This is again, a good time to have some substantial cash and some inverse stock hedges. Remember our often repeated caveats regarding the same. 

We should have a small one day countertr end rally tomorrow, but after that, our view is that stocks will be headed lower. We will see. If the decline we anticipate comes, we expect it to take 3 to 6 weeks to play out. We’ll do our best to update you on a potential bottom should we be able to recognize it.