Market Commentary for May 2020

"We have a strategy for this... "

By Alan Hull

This commentary is in part or entirely created using extracts and comments from my weekly Blue Chip Report. For more information about the Blue Chip Report, including subscription details and a recent sample report, go to Blue Chip Report

Here are some comments I made a month ago....

...I doubt we are seeing a 'V' shaped recovery.

I strongly suspect that this is a bear market rally caused by the unprecedented injection of stimulus around the world.

But regardless of whether I'm right or wrong...the historically record high and sustained levels of volatility are enough of a warning sign for me to stay market neutral.

On the first comment above, I was at least partially wrong as we are seeing a 'V' shaped recovery on the U.S. NASDAQ market...

However I still believe my second comment is valid and I stand strongly by the third comment. Here's some very concerning facts about the situation in the U.S. at the moment....

  • The U.S. mortality rate from the COVID-19 pandemic now rivals that for the entire Vietnam war
  • U.S debt as a percentage of GDP is at an all-time high and GDP is negative for the first time in 10 years
  • Unemployment is skyrocketing with the Federal Reserve admitting it won't get back to where it was for a long time
  • U.S. China relations are at an all-time low as Trump is blaming China for COVID-19 pandemic and may seek compensation

But to muddy the waters, here are some positives...

  • 8 U.S. States have now partially re-opened and more are set to follow shortly
  • The infection rate in the U.S. has stabilised and may even be in slight, gradual decline
  • A record 3.2 Trillion USD stimulus package roll out and Federal Reserve holding rates at near zero
  • Dr Fauci, immunologist & NIAID Director, has promoted Remdesivir as a promising treatment for COVID-19

It's obvious from the chart of the NASDAQ Composite index that the U.S. markets are favouring the positives over the negatives at the moment. And other world markets, including ours, are playing follow the leader with the U.S. markets. (Albeit with not quite the same level of enthusiasm) So what should we be doing as investors? Firstly we need to decide whether we want to take a short or long term approach...or maybe a bit of both.

Going back to the above lists of positives & negatives and a closer look reveals that the positives are short term while the negatives are long term. In other words the U.S. may be getting past the worst of the COVID-19 pandemic (which I suspect is highly optimistic) and as markets work in future time, they are front running the recovery. This is further supported by the nature of the stocks that are outperforming.

Up until recently the outperformers have been stocks like Pay-Pal, Netflix, CSL, Resmed, Woolworths. These stocks are COVID-19 friendly and have benefited from the shutdown. But now we are starting to see short term speculators switching their focus to stocks that are set to recover as the world comes to grips with COVID-19 such as Boeing, Walt Disney, QANTAS, Credit Corp, Star Entertainment.

Now I emphasise that these stocks are being bought and sold by short term speculators. Of course if you wish to trade in the short term then we have a strategy for this. But it's important that you understand what you're signing up for and it's not a buy-and-hold kinda thing. You are speculating on the passage of the COVID-19 pandemic and if you go back to the NASDAQ chart you'll see just how short term this game is. The entire 'V' shape has happened over just 10 weeks.

But now let's take a look at the bigger picture with a long term chart of SP-500 index....

The SP-500 index is more significant than the NASDAQ because it represents the NYSE as well as the NASDAQ Stockmarket. And on this chart I can see the SP-500 has now made a lower low (than it did at the start of 2019). This is a very robust signal that the bull run of the previous decade is over. So regardless of the short term gyrations of the markets, and given the appalling state of global fundamentals, the longer term outlook is sideways to down. And I suspect more the latter than the former.

In preparation for this longer term outlook, I am close to market neutral and waiting for the dust to settle. And we definitely have a strategy for this. So there are two things going on at once here and it's confusing a lot of investors. You can engage in both timeframes if you wish but I strongly implore you to make the bigger picture your first priority.

There will be many opportunities going forward and keeping sight of the bigger picture will help you to maintain your bearing...and preserve your capital. And you'll want lots of capital to buy all the bargain priced, high yielding income stocks that I think await us in the future. And yes...we have a strategy for this as well.