Happy Spring to All,
May Market Update
Reading the markets and interpreting the news is never an exact science. The markets tend to be a self-fulfilling prophecy. If enough traders think that the market is going higher and they put their money in that direction, it will drive the market higher. Over the last two weeks we have seen a choppy, low volume move up into the area of the flat 100 and 200 period moving averages on the $SPY and $DIA.
Only the tech heavy $QQQ has maintained its bullish uptrend.
Fundamental analysis often takes a long time to catch up with the technicals and the news, but the hard reality of the fundamentals usually catches up to the markets, bringing it back to its senses.
What to Watch For
After an almost 30% to 36% move down from the highs, the S&P has bounced 19% to 22% off the lows, continuing to form a bear flag formation. Currently, we are on the upper end of the flag. The potential is setting up for another rotation to the downside.
Gold continues to move higher in tandem with Bitcoin, which is the normal correlation. So another ETF to keep an eye on is $GLD which is the Gold ETF (Electronic traded fund).
One Bitcoin ($BTCUSD) tracking stock is $GBTC.
The US Dollar index $DXY has moved down over the last few days and certainly during The Fed Meeting on 4/29. This has driven equity markets higher and helped support the move in $GLD and $BTCUSD, even though we see the USD holding its own against most global currencies. This signifies that gold should rally back up to the $1900 prior resistance level. A reminder from last month: “In times of uncertainty, gold is the crown jewel! Gold is the oldest & most trusted safe haven on earth.”
Other stocks to keep an eye on are mainly defense stocks, as we believe that this year the old saying, “Sell in May and go away”, will be all the more relevant. Here are a few defense names to consider watching, as well as some techs that have exposure: $WDFC, $FLO, $VIRT $DZP.
Update from two weeks ago: $GILD and $NFLX; we did not have all winning ideas but in trading, you never do. Needless to say, we were spot on with these two:
We will continue to lean in the direction of caution. We believe that you should sit on your hands when things do not make sense. For instance, the current surge in the market that we just saw over the last few weeks seems to be a bull trap laid out by the institutions looking to sell baskets of equities of their excess supply to the retail investor; while preparing to unload every ounce of stock they can at a 20% higher price than they could have at the lows, only to buy it back 40% cheaper after the next negative news cycle. When the focus turns to unemployment, the damages to the supply cycle and real estate defaults.
Remember, markets very rarely bottom, they usually double bottom and base before a true reversal or resumption of a trend.
We don’t think that 3 to 4 weeks ago any of us understood what flattening of the curve meant. Many of the experts meant that flattening the curve would just prolong and preserve the medical infrastructure of a nation state. It is becoming obvious that there will be no getting back to normal and that the new normal will be social distancing and a much more subdued economic atmosphere. We see this in the numbers of the US, Italy, Spain, France, England and Germany where we have not seen a complete drop off in new cases, but have seen only a reduction in new cases and new deaths. In places like Brazil, Mexico and other locations in the Southern Hemisphere, the new cases and deaths all seem to be continuing to increase as expected. The shutdowns in these locations could lead to further disruption to the supply chain.
Sadly, even though the stock market has been going up, we feel that reality will evenly start to set in. We will start to see the impact of the economic disaster and the after effects the quarantine and pandemic have caused in the second quarter. Markets can stay irrational for a while, but not with 25% of people not working and many businesses and companies not operating or producing as they normally do. With this reality, prospects of a quick recovery will eventually be dashed, even in the event that things open back up and virus cases and deaths are significantly reduced.
Best of luck to you all. This is not investment advice by any means, just an outlook of things that might come our way. Trade Well, Stay Safe.
Research contributed by Michael DiGioia – Institutional Sales
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