Market Commentary for April 2020

"Stimulus and volatility... "

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 snippets from my March commentary which I wrote at the start of the second week of the correction....

On Monday afternoon at the time of writing, we are seeing a relief rally but the damage is done and we are now in the endgame of the bull run that started over a decade ago.

The London FTSE100 index has been trading in a well defined channel for the past decade. That ended last week. The NASDAQ Composite shows the speed with which the market went into a correction. There was no technical warning or topping pattern. The NASDAQ gapped out of its trend at the start of last week and then fell over 10%.

And our ASX200 index wiped out 6 months of gains in 1 week...

In the very short term markets are likely to rebound and this could last days or weeks. I am using it as an opportunity to sell down my holdings and assume a defensive posture. Managing this situation is a day-by-day proposition.

One thing that I don't recommend...is relying solely on this monthly commentary for guidance as it is a complete coincidence that the current situation has occurred at the end of the month.

We had one week to sell down before the full fury of this correction struck. When I wrote the March commentary the markets were down about 10% from their recent highs. The week starting the 9th of March really did the damage and by Friday the 13th, taking a 10% loss a week earlier looked like a really good idea. By the following Friday the ASX200 had fallen over 2,000 points from its peak, to below 5,000 points.

At this stage it was too late to do anything as the markets would probably rebound from these extreme lows anyway. In fact they have done exactly that, although 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. In other words I don't think we have seen the bottom.

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. The U.S.'s SP-500 index has traded through an average range of 4.7% for the past 5 days. Our local ASX200 index is slightly more at 5.1%. The following chart of the SP-500 has an ATR volatility indicator in the bottom window measuring a 14 day average of 149 points...

This is a new all time high and you can see how the indicator has been holding up at this level for nearly 2 weeks. Now compare the current levels to the correction that occurred in late 2018 where the volatility resembles a speed hump by comparison. So anyone who is buying or selling in the current environment is largely speculating with the volatility at these levels.

That said, if you want to move closer to market neutral by selling down a bit or buying a hedge (like an inverse ETF) then now is probably not a bad time. I traded through the crash of 1987, the Asian correction of 1997, the Tech Wreck in 2000 and the 2008 GFC. That makes this my fifth major correction and I can tell you from experience they are all different and they are all the same...and this one is a long way from over.

We are in the late stages of the initial phase and what we were doing just a month ago is now obsolete. We need to apply totally new tactics to deal with a totally new paradigm. There will be some amazing opportunities for savvy investors as we move forward but right now the main game is capital preservation. I reiterate...anyone who is buying or selling in the current environment is largely speculating with the volatility at these levels.