It is interesting to see April 30, 2020 close at the exact level it was a year ago: $2954. Will it test to $2728 like it did last year? TBD. This was the theme last week. The question remains!
Quick Thoughts/Questions I Ask Myself:
- Over $4.5 trillion dollars are currently sitting in cash/money market accounts. There are three scenarios that could occur here:
- Could the amount of cash on the sidelines lead to an extended rally when more States open-up despite the economic damage?
- Does this lead to profit taking after an incredible rally?
- OR do we trade sideways in a range for an extended period of time?
First off, regardless of my opinion, we will watch price action and adjust based on the price action itself; not dramatic headline news. It should be clear by now that the Street couldn’t care less about the horrendous data that has been released on the economic front. The Street is pricing out 6-8 months. This is a hard concept for most to comprehend, as our current living environment is not what the market is pricing.
Currently, with the S&P 500’s RSI (Relative Strength Index) at 63 (we view 70 as overbought), we believe there could be room to move to $2954 or get near $3000. The range we have been discussing for quite some time is $2728-2954. We remain within this range. It fascinates me how sentiment changes in one week. Last week, after three weeks of losses across major indexes, people were saying “sell”. Now, these same people are saying “buy” after an impressive rally. THERE IS NOTHING LIKE PRICE TO CHANGE SENTIMENT. People see green, and they believe this is the “green-light” to invest. Being that we closed above $2921, it wouldn’t surprise me to see many that were cautious or in cash begin to switch their stance. This is often how overbought levels extend. This scenario is certainly possible. Right around $2954 we will be close to being overbought, but that does not mean we don’t go higher.
In short, a little extension higher wouldn’t surprise me, though my expectation is that we will go a little higher and remain in a range between $2728 and $2954 for quite some time. People forget that we traded in this range for nearly 5 months in 2019 (June-Oct 2019). This consolidation led to great things, though we do have several things to work out. I remain optimistic long-term. The market has historically proven it is stupid to think otherwise given any circumstance. Short-term, the catch-up trade could be likely, though I believe the next few months could be stressful period that is range-bound. Range-bound moves, where we remain stuck-in for months, frustrates the Street the most. We have to also consider an election is coming. A reminder that your opinion on who becomes president should not impact your take on the market. The reality is this: the market doesn’t like uncertainty. So a slight pullback would be normal, but after the election the market usually rebounds regardless of which political party takes office. It is a reoccurring theme where many incorporate political opinions into investing and they can’t fathom being completely wrong. News flash, the majority of market participants are wrong! You’re seeing this play out currently with 56% being bearish and the market rallying hard. The election will create uncertainty, though it often leads to great things after a couple of months.
In short, fundamentals are not pretty though technicals are holding-up strong! There are opportunities, though there we believe the risks have elevated given the environment. There is no doubting a company such as Microsoft, $MSFT, can thrive in this environment. The real question is, “Are these names overbought/expensive?” The P/E (Price to Earnings ratios) are a bit concerning (high) given the circumstances. All in all, a little upside wouldn’t surprise me in the coming week. Mid-term we expect a long drawn-out range to consolidate some of these gains. If we can hold $2890, this would be impressive and we’d likely shift allocation on a pullback. The $2728-$2954 range is where we believe we could remain for quite some time. Though we don’t have a crystal ball, I don’t expect a retest to $2180, but if this does occur, price action will guide us. If $2728, doesn’t hold, that will likely lead to unfortunate things.
Technicals help us gauge levels of interest where buyers have came in or have sold. Technicals have certainly aided in this process as fundamentals, for the time being, have been thrown out the window. Very few companies are discussing guidance in their earnings calls. Eventually, we will have to deal with this, but for the time being the Street is essentially saying, “Can the numbers get much worse?” The market bottoms on bad news! We have had plenty of bad news. Sheesh!
Have we timed this perfectly? No. We did well in having a large amount in cash at the peak, but trimmed early on the way up. I do expect to test the bottom of range at $2728 at some point, but right now the Street appears to becoming a little more bullish. We continue to have some invested, though risk-reward we continue to question. There might be a few day window to jump in. The majority of the market’s moves have been occurring in after-hours. This has led to difficult decisions during the day, whether to chase or not. The majority of the days this week sold off at the close, making it difficult to want to buy into the close. Then the market would rally overnight. There have been several head-fakes in both directions. Friday, was the first day that held-up quite strong. As a result, this will make the bearish consider their thesis.
In summary, we have been range bound for about a month between $2728 and $2954 testing the highs and lows of this range. If we can hold $2954 on a close this could lead to more buying. With that said, the RSI will be close to being overbought at $2954 and the risk would be elevated. Difficult decisions ahead. We have several names ready to put to work. We will be watching closely. Emotions must be that of a robot! Throw out the news and watch price action. I am speaking to myself and readers alike!
Index Perspective
Trends We are Watching:
What we want to see?
The Financial and Industrial sectors continue to play catch-up. Bond yields need to show improvement as well (increase). We saw signs of this on Thursday and Friday, though we need to see follow-thru. Could energy get a bid? This “play” could be interesting.
Bespoke Oscillator
Citation: “Bespoke Trend Analyzer.” Bespoke Investment Group, Bespoke Investment Group LLC, 8 May. 2020, www.bespokepremium.com/trend-analyzer/.
Again, take the above worth a grain of salt, as this summary is extremely broad. We simply like to see how the chart changes week-to-week. DO NOT take this as buy or sell recommendation. A “Neutral” timing notification does not mean things can’t go lower. Also, note the number of indexes above their 50-DMA’s. Nonetheless, the analyzer is an interesting tool and is not meant to be a “predictor” of when to buy. As witnessed throughout history, an “Overbought” stance does not mean it can’t remain “Overbought” for quite a long time!
We appreciate your business and we will continue to grind.
Have a great weekend!
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This post is for informational use only. The views expressed are those of the author, Jonathan M. Gurney. This material is not intended to be relied upon as a forecast, research, or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
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