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.