TSX
The TSX 300 is testing its 50 day SMA, and remains above its more important 200 day SMA near 15,800. It failed at a resistance point in the 16,800 area that has mostly contained this index since early 2018. Assuming the 200 day doesn’t get taken out, I’d think that the TSX is going to be range bound and held below that 16,800 for the time being. Meanwhile, a break of the 200 day might imply old support levels in the 15,000 are tested. This chart looks more vulnerable than the two above (not as much downside as the NDX, but more likely to see that downside given its more sideways trading pattern over the past 2 years).
What might cause the above support levels to crack on NA indices?
September and October are statistically the worst months for stocks – although less so for the percentage of times these months actually lose money – and more for the extent they lose if they do go down. The election cycle also puts some pressure on the markets over the next two months, given the statistics I’ve quoted on this blog in the past for weakness in the two months leading into a Presidential election. Markets are usually volatile in the current period coming into an election. As well, I’ve seen some evidence of a second wave of the COVID-19 being underway -including here in Canada. This might make the election cycle stretched (given mail-in voting problems etc).
What might inspire the support levels to hold?
Market sentiment seems to be turning positive after Pfizer’s (PFE-US) CEO Albert Bourla said that a coronavirus vaccine could be distributed in the US before the year-end.
Also, we are seeing continued enthusiasm for the FED’s helicopter money program. The $2.2T Cares Act seems to becoming a done deal. We all know what the Fed money printing has done for markets. As much as it worries us, the policy can perpetuate the neartermed momentum of an overbought market. So there’s that, being in favor of the market holding its support levels.
And then, there’s the future…
Speaking of helicopter money and MMT (free money for everyone, employed or not – deficits be damned!): At ValueTrend, we are convinced that these policies will likely see a new world of higher inflation in the near future. I discussed some investment opportunities that might evolve in the face of that likelihood here. David Chapman at Enriched Investing notes something interesting. David expresses a similar view to those of ValueTrend regarding the potential for inflation in the future: “Incomes are UP as we went into the recession – this has never happened. We are looking at a $5-$6T deficit range 2020-2021, 25% of GDP. Investors need to think about protecting their purchasing power, de-globalization and re-shoring supply chains…”.
So whats a po’ boy to do?
We continue to hold nearly 25% in cash coming into the election, while emphasizing value and higher dividend stocks with the majority of the portfolio. Along with those strategies, we are slowly moving into commodity based equities and international plays (such as the Emerging Markets) with an eye on inflation, deficits, the dollar(s), and other factors. While our stance on the value plays and cash are more neartermed, our view on the inflation hedging via commodities and International plays are looking out a bit further. We feel that both need to be addressed. As SuperTramp sang: “Take the long road home“. Such a great song.
Happy trading!
5 Comments
Interesting, Keith. But what would cause inflation? Money is broken. It’s free (low borrowing rate, no savings rate-savers be damned). The markets have inflated. But what else? Taxes? Healthcare?
I fear bond losses (bankruptcy) and not inflation. What am I missing?
M2 money supply (free money for all!) is up in a beyond imaginable way. More money circulating means “supply” of money has increased, with “demand” for goods such as food lumber etc being the same. So eventually, the side with all of the supply (people with lots of money and cheap credit) chase and compete for the goods.
Also–to your point, stock market gains create something called the wealth effect. – which is basically feeling more financially secure because your investment account holding a bunch of FAANGs is now $200,000 when it was only $100,000 3 years ago…with that nice fat investment account along with your RRSP (401K) also higher, you feel confident in buying the $70 bottle of wine or the better cut of steak or finishing the deck. Demand is up for lots of goods because of a feeling brought on by security in the present, and in the future—thank-you Mr. Trump for the business tax breaks, and the easy-money FED for making me and my wealth and future look so secure….
Great example is real estate. Ask a new home buyer what they are expected to pay for a tiny semi-detached house virtually everywhere near a Canadian city (lets take Alberta out of this example…). Then look at what that same house/equivalent house sold for just 5 years ago. That’s called inflation. Lots of people with lots of cheap credit and now lots of money (via both MMT and stock market gains/”wealth effect”) chasing goods (housing) causing an increase in price.
Thanks for your response, Keith. I appreciate it.
Hi Keith:
We are already seeing some potential inflation driving manifestations. Parts of the country report shortages of lumber and major increases in price of that lumber across the country. Preliminary but it is a start.
Supply, demand!