Market musings

Despite the recent rally, we are witnessing a few concerning developments, such as a continuation of the high-risk warnings from the Bear-o-meter. We are also cognizant of the risk coming out of the Jackson Hole meeting this week, and the often weak seasonal trends for August and September.  With these factors in mind, Craig and I recently sold a bit more equity from our two platforms (Equity and Aggressive Equity). We’re back to about 40% cash in our models. Here are some recent observations and musings that have been in the forefront of my mind lately:

Bear trap?

From Seeking Alpha:

This stock market rally echoes bear market moves going back to the onset of the Great Depression, according to Bank of America Securities. The average S&P 500 gain in 43 bear market rallies of more than 10% going back to 1929 is 17.2% over 39 trading days, while in this case, it is up 17.4% in 41 days, making it a “textbook” example. This time around, 30% of the S&P’s gain is due to just four stocks – Amazon, Apple, Microsoft and Tesla – noted strategist Michael Hartnett, adding that another risk for bulls is that whether the “Fed knows it or not, they’re nowhere near done.” 

 

Breakout, or breakdown?

Food for thought – JP Morgan notes that “The breadth of short covering over the last 5 weeks was a large driver of the recent rally. However, the short sellers came back on Wednesday of last week.”

So, with the short covering mostly over – what’s next? Here is the chart of the NASDAQ – which lead the charge in the recent rally. Note the bearish trend channel, which appeared to be bullishly broken in the recent rally. But wait–was that breakout a failed spike? Its only one day below the trendline. Not an emergency…yet. However…a few days without further upside on the NAZ will indicate if the NAZ will move back down within its channel.

Same goes for the SPX…

 

Not so much for the TSX – which has remained above its trend channel. For now…

Canada’s living standards and GDP growth projected to be dead last in developed nation economies

Canada needs to change: The OECD recently predicted that Canada can, at best, achieve real per capita GDP growth of only 0.7 percent per annum over 2020-2030. This places us dead last among advanced countries! They also predict Canada will struggle going out to 2060.

From the British Business council (who are non partisan to Canadian politics): “It is time for Canada’s political class to rethink their priorities and take steps to create the conditions for a more productive economy. This will require some hard thinking and expertise about how to raise labor productivity growth and real wage growth through higher business investment per worker, faster innovation adoption, and adjusting the incentives (and disincentives) facing Canadian companies aspiring to operate at scale.”

Business Council of British Columbia | OECD predicts Canada will be… (bcbc.com)

Here are some of my takes on this problem:

Canada’s households debt increased to 180.02 percent of gross income in 2022, per the recent Stats Can report. An overleveraged consumer, with rising rates = problems.

Worse still….Government Debt in Canada increased to 1048.75 CAD Billion in 2021 per the Stats Can report. Take a look at the chart below – obviously the prudent thing to do is to get ahold of the current deficit, at least. Then start to work on the debt problem.

But wait…Instead of peeling back spending, or as the OECD reports suggests, focusing on increasing production, the recent budget added billions of dollars in new spending by the Liberal Government. This, in concert with the NDP socialist coalition. I’m sure I will get some flack here, but PC candidate Pierre Poilievre, who is a finance guy, did a humorous video of “breakfast with Justin“. The video portrays him to trying to explain in simple language (that perhaps our self-confessed mathematically challenged PM might actually understand) the errors of building up more debt in the face of growing inflation and massive current debt.

Investment implications

Bottom line – if OPEC is correct, it might not be surprising to see Canadian stocks, outside of our energy industry (the products of which have worldwide demand), fail to keep up with global competitors.

Is volatility back?

In my blog of last week (Playing the Fed’s Bluff) , I suggested that “One needs to keep an eye open for an upwards reversal in the VIX as it breaches the 20 line.”

Seems we may have that condition playing out. The VIX hit about 19 and then reversed yesterday – take a look at the right side of the chart. Keep an eye – if the VIX continues to rise, look for more downside on the market.

 

quote-teal

3 Comments

  • A general question:

    For those wishing to rebalance towards lower beta and cash options what do you recommend where a scenario involves current paper losses?

    For example, down on PayPal and Facebook, I’d happily sell and buy some low beta names or just cash but when sitting at a 30% paper loss or more it hurts bad to consider taking that loss
    Especially in a registered account.

    So, I’ve been waiting for the long dated securities to turn around.

    However, it sounds like it’s going to be a long process, with some
    analysts predicting rates not being cut until 2024.

    Thanks as always and I hope this helps others in similar situations.

    Reply
    • Lance- your loss is a personal thing. The market is unbiased and unknowing/uncaring of people who have lost or made money. It will push stocks up and down according to the collective greed/fear and perceived value. So the only thing you can do is force yourself to pretend you are a new investor looking at your stocks. Would you buy them with a target of your old buy price? If you would–buy more! If not–you need to sell. I wont advise you, but you might look at PYPL and say, gee, it has a pretty strong resistance point at the $115-$120 point. If you thought it might continue the recent rally based on momentum studies etc–you might target selling the stock at the resistance point. It simply doesn’t matter what you paid. The market will not give it back to you unless the crowd likes the stock enough to move it back up. And you need to be unbiased as to that potential based on the charts. Eg–we just sold a stock at a loss the other day. It underperformed its peers, broke support, and we had to sell. Simple. No emotion. The market did not seem to care what we paid (grin!).
      Please take my TA Online course. It will save you much more than the cost of the course by learning a disciplined approach to these things.
      Hope that helps!!

      Reply

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