As we turn the corner to the end of a difficult month and quarter, we’d like to provide an update on our forward-looking strategic outlook.
It has been a strange quarter to say the least, as we saw early gains in the global markets for January and February, only to close the quarter out with March delivering one of the worst months in the last 70 years. It all added up to one of the worst quarters since 2008 producing a lot of anxiety from both asset prices and Corona coughs…….
Worst Monthly S&P 500 Performances Since 1950
One of the positives with turning the page on March is that April has been the best performing month for the market over the last 13 years, with an average gain per month of 2.50%. Only April of 2012 where the market fell by less than 1% was a negative April. So far we are off to a good start, although it is sure to be a long month of emotional challenges.
Market Bottom Checklist
We wanted to circle back around and provide an update on the checklist we provided last week to help determine a solid market bottom. As we have mentioned repeatedly… finding a bottom is a process. You can expect strong up days that are going to make you think the worst is behind us and you can anticipate down days that can cause you to open the liquor cabinet. Bottoms are never delicate, but the process works and has always led to higher returns over time. Here are updates to our checklist:
- Oversold Conditions– Again we were at record oversold levels two weeks ago, so we can check this box off.
- Bearish Sentiment- We have seen a massive surge in the bearish percentage amongst the Investors Intelligence survey in the last 3 weeks. Currently sitting at 41.7% on the bearish side versus an average of 21% over the last decade, this is the highest reading we have seen since 2011. Also, this is the largest 4-week change in bearish percentage in history. So, we can check this box off.
- Falling Stock Correlations- Based on our data we are not there yet with this indicator as we are not recording any positive divergence in the average stock performance on down market days. Although it has improved over the last two weeks, we are still seeing too much participation by the average stock on negative days.
- Stocks Making New Lows- We have seen the number of daily news lows decrease in a large way in response to the market firming up over the last two weeks. But we are only going to half check this box since we need to see if there is any divergence on new lows if/when the market retests the lows of March 23. There is improvement here, but more work needs to be done to confirm.
- Strong Breadth– This is a mixed bag as last week saw three very positive breadth (number of stocks advancing vs declining each day), but we have not seen continued follow through and also we still see a bit too much participation when the market moves low. We still need more consistent positive breadth to check this box.
Special Breadth Note– The market had 3 consecutive days last week (March 24, 25, 26) where advancing volume was +80%, which is a very rare event. There have been 7 times this has occurred in the history of the market, most recently February 2016. Interesting is that all 7 of the previous events marked an acceleration of the market off its lows.
- Risk Seeking Leadership– We are looking for the high beta names, the more aggressive names, to lead off the bottom, but so far this has been underwhelming. There was good participation last week, but leadership in higher beta assets has fallen this week. Box not checked.
- Positive Credit Spreads- While we have seen the bond markets in general calm down and show some return to normality, we are still seeing wider spreads in the yields of investment and non-investment grade bonds relative to Treasuries. This is more a product of liquidity, which should improve with the assistance of the Fed, but we need to see credit spread return to normal ranges to feel more confident.
While there have been improvements with our checklist over the last week and a half, there are still more boxes to be checked off going forward.
The process will continue for however long is necessary to hammer out a solid support level to build off. Last week provided the 2nd strongest 5-day rally we have seen since 1960 in the S&P, only an early October rally in 2008 was stronger. What remains to be seen is if this is the beginning of a new trend higher or just a bear market rally. There are a number of historic data points that say it’s the start of a new trend, but again we have to take into account how much we have fallen, how fast we have fallen, and how much negative news is still out there. A retest of the lows is likely and maybe even welcomed on our end, as it would give us a greater conviction that the bottom is in and the worst is behind us.
Oil and OPEC/OPEC+
The market received some welcomed news last week as Saudi Arabia called for an emergency meeting on April 6th with OPEC and OPEC+ members, Russia is the (+) in OPEC+. Oil spiked 25%, the largest one day gain on record, in anticipation that the meeting will put an end to the price war between Saudi Arabia and Russia that started in early March. The price war that erupted over the weekend of March 7-8 caused crude oil to crash to an 18-year low as oil prices were already struggling with decreased demand caused by coronavirus lockdowns.
Of course, nothing is easy when it comes to the geopolitical nature of oil, so the meeting scheduled for April 6th has now been pushed back to April 9th. Tension flared up late Friday between Russia and the Saudis, but at least the meeting has been rescheduled and not canceled altogether.
We cannot stress how important an agreement on oil would be for the overall market, something most investors are overlooking since the news has been all been about the coronavirus. But, consider that through the market close on Friday, March 6th, the S&P 500 had lost 295 points or 9.12%. Following the news of the price war that erupted over the weekend of March 7-8, the S&P went on to lose 586 points over the next 6 trading days, dropping the S&P by an additional 19.72%. The coronavirus had been a concern since January, so it is difficult to assume that all of the 19.72% drop was associated with only the virus outbreak. A positive outcome from the OPEC meeting could go a long way to getting the market moving in the right direction.
One Final Point…..
The length of any bottoming process is unknown until its finally over. However, we are picking up some interesting data points when looking across the numbers that we track that are encouraging. Last month just about every area of the market was down more than 10%, except for the Nasdaq which closed with a loss of 867 points or down -9.25%. The Nasdaq was the “best of the worst” last month. We also looked at the performance of the Nasdaq during the actual day sessions in the market from 9:30 am to 4:00 pm vs the overnight futures market which runs from the close to the open.
Looking at the data we get a very interesting picture of the actual selling or lack thereof that took place last month in the Nasdaq:
|Nasdaq Total Point Loss for March:||-867.28 points (-9.24%)|
|Nasdaq Total Point Loss during the overnight futures session:||-1,391.10|
Nasdaq Total Point Gain during the day sessions in March:
What we saw during the month of March in the Nasdaq was very unusual as basically 160% of all selling of the index came during the overnight futures session. For as bad as the index and the overall market was last month, the Nasdaq add over 500 points throughout the day sessions during the month.
Selling during the day session is a sign of distribution or massive selling across the board by all types of investors, but mostly from institutions due to their size and liquidation power. Looking at March, it is clear to us that the large institutions were actually net buyers throughout the month. This tells us that the big firms are buying the shares of the retail investor who may be panicked and looking to sell. This is a very bullish indicator to us.
In conclusion, the bottoming process is working itself out. We are seeing positives show up in many different places. The process is not perfect, it will be stressful some days and jubilant on others. Just try to remain levelheaded and trust the process at hand. We will keep you updated on both the positive and negative data that we see and let you know if there is any change to our overall outlook.
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