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Coronavirus Spread Could Push Market Towards Correction

There are recent market factors that are giving global investors some pause about the durability of this nearly 11-year old bull market, and I can sympathize somewhat. However, please don’t call me a bear. I think that despite the potential for an up to 10% or so correction, the bull beat will go on. Nevertheless, volatility in equity markets have risen sharply this week (with the VIX “fear index) pushing above 18 now) as the increasing apprehension around the coronavirus outbreak, coupled with mixed GDP visibility due to Boeing’ s (BA) MAX 737 production woes, are creating broad de-risking (U.S. Treasury 10-year bond yield falling and high yield spreads widening, etc. I recommend staying defensive with tech and healthcare sectors. And as I noted earlier in the week, this does not feel like a reflexive 2%-3% drawdown that ‘needs to be bought’ but rather, this seems like the start of a broader correction. Hence, the character of the market is changing from the relentless buying since October, to one where we need to ‘wait for the initial bottom’ before becoming more aggressive. POINT 1: PRELIMINARY THOUGHTS – 50 DAY MOVING AVERAGE OR 100 DMA IS WHERE I SEE INITIAL BOTTOMS Source: FS Insight, Bloomberg I think a likely place to expect markets to find some footing is maybe the 50 dma but more likely between 100 dma and 200 dma. These levels are: (i) 50 dma: 3,211, (ii) 100 dma: 3,111, and (iii) 200 dma: 3,011 How odd is it that the moving averages are spaced 100 points apart?? Really interesting. POINT 2: IN 2019 THE CORRECTIONS ENDED SOMEWHERE BETWEEN 100 dma AND 200 dma… PROBABLY THIS ONE WILL TOO… Source: FS Insight, Bloomberg In 2019, we saw 3 drawdowns greater than 5% and those are marked above. We also have the moving averages and the daily RSI indicated. See chart above. Notice a few commonalities? The sell-offs ended between the 100D and 200D mavg Daily RSI fell to ~30 (<35 in one case). BOTTOM LINE: INITIAL BOTTOM MAY BE BETWEEN 3,011 TO 3,111 WHICH IS 100D/200D AND DAILY RELATIVE STRENGTH INDEX <35 The reason I believe the 50 dma may not hold (3,211) is that at 3,211, the S&P 500 is at a negative year to date return. I think this makes some asset allocators, investors, speculators and machines think this is January 2018 again. Thus, selling would amplify at the 50 dma. We are not bearish for the year, however, because we see economic and valuation tailwinds in 2020. Economic: Momentum (post-Coronavirus) will likely strengthen on pent-up demand, post-trade war ramp-up and fiscal stimulus (US possibly, Japan and potentially Europe) and thus, EPS growth should be >10% in 2H2020. Valuation: the Fed “Put” plus the TINA (there is no alternative) “put” added to accelerating 2H20 economic momentum, I believe, will equal equity risk premiums falling and a rising stock market. STAY DEFENSIVE AND THAT IS TECHNOLOGY (YUP) AND HEALTHCARE… Figure: Comparative matrix of risk/reward drivers in 2020Per FS Insight Figure: FS Insight Portfolio Strategy Summary – Relative to S&P 500** Performance is calculated since strategy introduction, 1/10/2019 Source: FS Insight, Bloomberg

  • US Policy
Jan 24, 2020

Impeachment Saga Again Dominates Policy and Politics in DC

With the ongoing impeachment trial and minute by minute news headlines, it is hard for investors to break through to the other important issues, which are sidelined while the House managers argue their case to the Senate. Given the GOP numbers in the Senate and a needed 2/3 majority for conviction, it’s a Kabuki play, more showmanship than content. The only real question is whether or not the process will be dragged on for weeks with the calling of witnesses, a move that only requires a 50% majority. The White House appears ready to argue executive privilege to try and stop former National Security Adviser John Bolton and others from testifying. In my view, Senate Majority Leader Mitch McConnell knows that while the Republican majority will dismiss the charges, an extended trial will hurt the handful of Republican senators who are running in competitive races this year. It is his view that the sooner the process comes to an end the better. The simple Senate math is that Republicans currently have a three seat majority and are likely to pick up a seat in Alabama giving them a four vote cushion. However, in Maine and Colorado they are defending seats in states Clinton won in 2016, Arizona has gone from red to purple and last year elected a Democratic senator and the Democrats have a strong Senate candidate. In Kansas with Secretary of State Mike Pompeo’s decision not to run for the Senate, Republicans are stuck with a weak candidate who lost to the Democrat for governor in 2018. If Republicans would lose these seats, and the Democrat wins the White House, the new Democratic Vice President would cast the tie breaking vote to give control to Senator Chuck Schumer and the Democrats. Senator McConnell is committed to prevent that outcome! Among the crucial issues that impeachment has drowned out are the growing concerns about the deadly outbreak of coronavirus in China; efforts by both Republicans and Democrats to deal with prescription drug prices; the threat posed by Iran ,and even the Iowa Caucuses with Senators Bernie Sanders, Elizabeth Warren and Amy Klobuchar sitting at their seats each day of the trial. The end of the trial, sooner than later, might be the best outcome for both parties. Figure: Top Trump Tweets The United States looks forward to welcoming Prime Minister @Netanyahu & Blue & White Chairman @Gantzbe to the @WhiteHouse next week. Reports about details and timing of our closely-held peace plan are purely speculative.— Donald J. Trump (@realDonaldTrump) January 23, 2020 One of the many great things about our just signed giant Trade Deal with China is that it will bring both the USA & China closer together in so many other ways. Terrific working with President Xi, a man who truly loves his country. Much more to come!— Donald J. Trump (@realDonaldTrump) January 22, 2020

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