A Date That Will Live In Infamy

I’ve stolen that sentence from Franklin D. Roosevelt to commemorate today’s date, October 19th. To those who have been long time participants in the stock markets, that day in 1987 was the single most traumatic experience in their lives, even as ensuing selloffs in the years since have arguably been as dramatic. At that time however, the speed and magnitude of the market sell off was unprecedented and the after effects would scar an entire generation of market participants, certainly me. The sheer value of market activity now dwarfs the capitalization of the market values then. Nevertheless, October 19, 1987 is a milestone date reminding everyone that things don’t always go according to plan.

As of today, the markets have experienced nothing short of a spectacular advance since the onset of the pandemic scare that devastated everything and everyone in March of this year. I won’t repeat all the comments that I offered in real time during those turgid times, readers can do that from the archives. Suffice to say, amongst the turmoil, there are always very good opportunities if conditions are assessed methodically. The key takeaway is that markets are not random; they are orderly in ways that can be analyzed and anticipated by the nature of their activity. Time has vindicated most of our tactics.

As one drills down into the constituents of the market, patterns do reveal themselves and provide opportunity if you apply objective analysis in your search. While the major indices are good barometers of activity, peering into individual components will yield insights into stocks and stock groups that yield larger alpha. We can also discern those sectors which are clearly not performing and can make some conclusions as to what that infers.

Pictured below is a relative performance chart of select instruments up to this point in the year.

Select market performance

With the Dow Jones illustrated in purple, we can easily see the out-performance of the tech laden Nasdaq issues thus far this year as illustrated by the red line. This may be old news for most market participants. What may be surprising are the other sectors that have performed as well or better than the high flying Nasdaq index and indeed the Dow Jones. The magenta line represents the performance of the XAU, or gold sector and the cyan line shows the activity in the home construction sector. Even as the markets appear to be in a period of consolidation, these sectors are at or near highs and i expect will go higher. From this information, we can conclude that certain parts of the consumer sector are strong and that is an implied vote of confidence in the economy going forward. As has been my main investment theme; buy relative strength. It also tells you that any political angst has been discounted.

At the other end of the performance scale are the large cap banks as represented by the green line. As we can see, this sector in general has been dead money for the last half year. We’ve pointed this out in past articles and little has changed here. This also has implications for the economic background, certainly as it pertains to interest rates. In such a rare low rate environment, the profitability of banks is hampered by narrow spreads. It’s unlikely that this will be the place to put money until we see some inflection in the path of rates.

If past presidential cycles hold and the incumbent Donald Trump retains office, we will likely see a continuance of robust economic activity which may translate into a higher rate environment during the latter part of his next term as competition for resources increases. The action in many other sensitive sectors such as housing and consumer goods will give hints of that. In addition, we will keep an eye on the ten year notes to determine if any inflection points are broached.

In the meantime, it is prudent to stay with what works and not to anticipate a trend change which may take longer than people think. We will all miss the absolute top but we hope to be alert to signs of any deterioration. There is an old market saying that the market climbs a wall of worry. Despite the robust activity in the markets, many are still worried about what could happen. That is a waste of energy. There may yet be some bone jarring corrections, but the longer term trends are the best guides for investment.

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