April 29, 2020

The HCM Buy-Line® is positive after going into week three of HCM moving money back into the markets. The past three weeks have been a period of real-time education on why trading a non-emotional system is so important. We have seen several well-known investors, managers, and financial journalists saying we are going back to 2200, and a possible drop to 1700 on the S&P 500 with mass devastation and the world changing as we know it. I will save you the suspense, they don’t know. You cannot know; something like this can’t be known until after the fact.  We are not in that camp. Will there be volatility and a pull back? Of course, but markets move off of what they do not know. The big mystery of the moment is will companies post bad earnings over the next two quarters? Well, not much of an unknown, of course they will. Some of the unknowns are how fast employment comes back and how fast people go back to eating out, going to social events such as concerts, sporting events, etc. Remember, like we wrote a few weeks back, people, especially in this period of time, have very short memories. A day feels like a week or two staying at home. 

Vanguard Small Cap

Small-caps began to show relative strength into last week, with Monday’s upside break-out from a 2-week trading range as another important trading signal for risk assets in general, and cyclicals specifically. This is a good sign that investors are moving back in.

With the rising opportunity cost of being in stocks or sitting it out, which way should you go?
The stock market, in the meantime, remains resilient, closing 100 points beyond the critical 50% retracement line (2,793), argues that equities have upside. 

The past 4 weeks have been the most devastating gauntlet for equities:
- COVID-19 pandemic
- World economy shuts down
- OPEC blows up
- Worst GDP print since the Great Depression
- 6mm unemployed claims
- WTI near contract goes negative at -$48 per barrel
- Q1 2020 EPS missing by 20%


Yet, the S&P 500 has managed to claw back 50% of its losses and NASDAQ is now up YTD. This resilience is telling that the consensus narrative of “the economy is dropping us down into the next great depression and we need to get out of stocks" is overly pessimistic.

COVID-19 Update:

New York is the hot bed, but the fact that case prevalence rose from 21.9% to 24.7% in 4 days (+280bp) raises the question if "stay at home" makes sense. We are not epidemiologists, but COVID-19 seems to be rapidly spreading in NYC, despite a strict "stay at home" order. If so, it does raise the serious question whether keeping the NYC economy closed makes any sense. That is, if COVID-19 continues to spread in NYC, and cases are rising by 280bp every 4 days, what is the purpose of shelter at home?

Governor Cuomo is using cases as less of a yardstick, for several reasons. Hospitalizations are falling.  Also, his serological studies show that the prevalence of COVID-19 is already much higher, and those studies show cases are still surging in NYC. Like the research has been telling us, COVID-19 is much more prevalent than previously thought as testing is staring to really ramp up, and we can see who has had the virus even without showing symptoms. 


More and more states are opening, and people are coming out to play. The beach this weekend was crowded in California, even with the stay at home order. Time will tell, but so far, the markets are telling us we are going to get through this.

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