May Update

We are well past the initial bomb blast that hit the markets in mid February.  The panic selling that ensued was a function of an un-quantifiable outside force which hit the markets without much warning.

Over the months, the nature of the threat has been identified and there are measures being taken globally to address the specific threat.  While there are still alarmists who contend that the danger is not past ( if ever), economies and markets are adjusting to the aftermath of the panicked hysteria.  It’s certain that life will go on of course, but the same cannot be said for the many companies and industries that have and will succumb to the draconian government measures imposed on most nations.

In previous posts, we have demonstrated that by using a fairly simple set of technical tools, we can logically address the wild swings of the past 2 months to make rational investment decisions.  We’ve explored the use of chart pattern tools,  volume and divergence statistics, relative strength as well as retracement strategies.   These are rough roadmaps in very uncertain terrain.

While tactics are important for daily analysis, having a strategic view of possibilities creates a trading approach that is rational as well as effective.  We have discussed having possible scenarios mapped out so that if/when they arise, we’ll be ready to take action rather than to just respond without thought.   It’s a simple truth in trading markets that getting in is easy, getting out is hard.

In our March 31st post, we discussed levels of resistance for the indices which were likely to be key thresholds during recovery. From the charts below we can observe that these resistance areas have contained the majority of the Dow and S&P stocks.  The exception is the Nasdaq index which has managed to push through the projected areas by virtue of their many high relative strength components.

Dow May 1

S&P 500 May 1Nasdaq May 1

Having scenarios derived from simple analysis gives a less frenzied view of market activity and creates manageable entry and exit areas.  The ongoing challenge is to manage risk. 

Unfortunately, investing is not just about indices; they can only give a reference to the backdrop for specific investments.  In the aftermath of the devastation brought about by enforced work stoppages, many companies and perhaps entire industries will not survive.  Already we’ve seen retailers Neiman Marcus, Macy’s and J Crew file for bankruptcy and likely many other anchor stores in major malls will follow.  We’ve been probing the future of airline and hospitality stocks for possible turnarounds but the longer that the shutdowns are prolonged, the more tenuous their eventual survivability.  Oil and petroleum related issues are another area of extreme stress.

The total scope of economic damage is great and at this point unknown, thus buying things just because they appear cheap is not a good tactic.

On the other side of this gloom are the industries that will likely survive and thrive in the new world which is emerging.  We can assume that things will not go back to the old normal in entirety.  Some of the companies that have made new all time highs have benefited from the stay at home protocols imposed on people.  Papa John’s Pizza, PZZA, Netflix, NFLX are some of the obvious recent beneficiaries as well as tele conferencing company Zoom, ZM.

While home sequestering will eventually end, it’s likely that the reality of teleconferencing will continue to be a mainstay of business activity as airplane travel is eschewed for tele-meetings.  We expect that more new companies will enter the space with better, more efficient solutions as time passes.  We know that Facebook, FB has been working on developing such technology as well as MSFT.  It’s likely that chipmakers will be required to provide the technology components needed in this space.  Of course, virtual reality is a large investment frontier and will be an area of great interest.

In the longer term it’s important that investors have a reasonably well thought out view of where things can lead. This will create a receptivity to new or existing companies in a hot space. It will also mean that many past winners may not be beneficiaries of the new economic zeitgeist.  Using some of the simple tools that are available to everyone, investors can confirm or discard investment theories in a systematic way.

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