Broker Check

Pullbacks Feeling Short for Now

July 08, 2020

Our last market blog post was May 12th.  There we highlighted the nice run-up in equity prices marked by the S&P500 since the Covid19 induced bear market that bottomed in March.  While we expected some sort of recovery in prices from March, deciding whether the recovery would be ‘V’ shaped or ‘W’ shaped was difficult to feel convicted about.  

Our cautious tone for adding to equities on May 12th, would’ve been accurate for a few days as the index declined 6% from peak to trough by May 14th.  This small test would be one that marks the type of pullbacks we have experienced since May 14th - short and swift.  Because from May 14th to June 8th the S&P500 only experienced 4 days of downward price action.  This type of continual drift higher reminds us of the FOMO markets we saw in 2019 where every tiny blip in downward price action was immediately bought up by anxious investors thinking they missed out on their buying opportunity. 

Previously we mentioned that the 200 day moving average acts as an inflection point for markets.  Since the beginning of June, the S&P500 has used that moving average as a support level several times, creating a sort of Flag pattern.  (for more information on Flag patterns, Click Here). Flags are seen as healthy price consolidation and due to the nature of this flag we became more courageous about the market actually adding to our equity exposure in the majority of our portfolios from June 29th to July 1st.

We feel that the road to economic recovery fundamentally remains a bit foggy.  Many countries are still imposing strict border control rules with some even completely shutting down their international travel, restaurants shutting back down in some states, positive cases on the rise again, and unemployment (although improving from the worst point) remaining high compared to historical levels. 

While the recovery is foggy, the thing we like about the market is that we are no longer in uncharted territory.  We’ve dealt with Covid round one, so at least now the market has a game plan for Covid round 2.  The S&P500 is continually pricing in all of these factors, and we believe now more than ever it is important to dissect and diagnose the companies/industries who are suited to benefit from our new reality. Already we have seen innovation by some companies.

If you’re reading this thinking there is some contradiction in our tone, that’s because the market is contradicting itself at the moment. Technically speaking (meaning price action) the market looks to be setting up for higher prices, while fundamentally (how much profit companies can make) there are large question marks looming in certain industries.  When this is the case, a more stoic approach serves investors better rather than a passionate tone about which direction you want the market to move.