March 05, 2020

We sent out an urgent update of the Wealth Watch Monday, and we have enclosed it at the bottom of today’s Wealth Watch for those of you who might have missed it.

The markets are trading just about spot on like we stated Monday; we can expect a modest, if not full, retest of the lows set last week. Potentially as low as 2900-2950 on the S&P 500. The markets are going to trade very erratically for a period of time until the volatility subsides. 


Look for Treasuries to give a good indication that buyers are coming back into equities. If TLT, the ETF of the 20+ year Treasuries, sells off and breaks below $152.50, this would be a good indicator that investors are moving back into equities. 

20 YR

Today, the Fed announced a 50bp ‘surprise’ rate cut, although this potential move was widely discussed over the last few days. The bearish view is that Fed cuts don’t fix the ‘supply’ problems about to erupt in the US, and a ‘demand’ surge is not needed. But the Fed 50bp cut is fixing the yield curve – this is a good thing.

Equity markets sold off Tuesday, despite the 'surprise' Fed cut -- and while many suggested this meant the cut was ineffective, think about Fed action for the past decade. The initial market reaction is not the ultimate market reaction (and given the effect on the yield curve, it should be ultimately positive). The 5Y-1Y is now +0.90b from negative over the last few weeks. The 30Y-10Y is getting massively steeper.  Thus, this move is not meant to fix ‘demand’ but rather, protect proper function of fixed income markets. We see this move as a positive.

If you think valuations are out of whack, take a look at bonds. Investment grade corporate bonds have a 40X P/E (2.5% yield) and the US 10-yr has a 110X P/E now (0.9% yield). Yet, the S&P 500 is sitting at 16X P/E, equities are looking pretty cheap at this point. 

Monday, March 2, 2020 - Wealth Watch: Special Update 

The markets had a five-day selloff with mass hysteria taking hold. There is mounting hysteria around COVID-19, and a consensus that “nothing is safe,”. The HCM BuyLine® did NOT Trigger a new sell signal, it has weakened, but still no sell signal. Again, we are hired to trade a mathematical system, not an emotional one.

In the past month, and particularly in the past week, divergences between asset markets suggest that the S&P 500 might see a catch-up trade that leads to a “V-shaped bounce.”  We believe there is a 60%-plus probability that stocks are bottoming this week.  And notably, the VIX touched 47, a level seen only at major turning points in 2010, 2011, 2015 and 2018.

Also, consider that the China stock market bottomed 3 weeks ago (fell 14%) and had a V-shaped rally of +14% and rallied to within 2% of 3-month highs. Think about this: China’s infections are still growing, and the economy has been at a virtual standstill. Yet, their equity market has staged a V-shaped rally. I’ll go over this in more detail in Wednesday’s edition of the Wealth Watch.

Our holdings have held up very well. Yes, we have had a pullback, no doubt about it, but in our three mutual funds we were hitting stops on Monday and Tuesday. No, we were not making emotional decisions, our funds are math based and as stops were being hit, the strongest asset classes were very short-term bonds and cash. Depending on the fund, we are approximately 27%- 62% in cash and bonds. And yes, we are ready to buy when a new signal presents itself.

I’ll go in more detail Wednesday, but for today what is our take? The market will be very sloppy, and its anybody’s guess as to which way it will go in the short-term. We will be monitoring the HCM BuyLine®, if there is change in the overall trend, we will be making adjustments accordingly. I would not be short this market, any good news and we could see a 2000-point rally on the DJIA in matter of days.  

Until Wednesday, here is a good book that every investor should read: Charles Mackay “Extraordinary Popular Delusions and the Madness of Crowds.”   


Until Wednesday, stay away from the news, they are paid to get people to buy their product, and in recent times that my not include the facts and/or the truth. 



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