Broker Check

Stay the Course

| February 28, 2020

Stay the Course

It just amazing how two days of quick sell-offs can change the sentiment from extremely bullish to bearish as investors rush out to de-risk all at the same time. According to NDR research, the Trading Sentiment Composite has now shifted to the excessive pessimism zone for the first time since October 2019. The last three days have seen $18 billion of outflow from the equity ETFs. Mark Dow explains the market reaction in his recent blog in which he discusses three phases of a sell-off.

To wit “Once the selling starts, it almost invariably shows up in the sectors and assets where the optimism was most vigorously expressed. In this case, that would be large cap tech. The selling can be sudden and severe. These names and sectors underperform (vol adjusted) pretty much everything else. This is what I call Phase I.

The names and sectors that outperformed in Phase I effectively ‘catch down’ with the names that were at the center of the storm. In this case, you would start to see the S&P under-perform the NASDAQ 100 (as we saw yesterday). This would be Phase II.

In Phase III, you typically see the hedges that you hastily slapped on late in Phase I stop working, even as the names/sectors/assets you held on to continue to get liquidated and go against you.”

We don’t know which selling phase we are in, with regard to the equity markets, but we have seen some selling exhaustion and I expect some stability here. Like I mentioned in my previous blog “Risk Off”, such sell-offs in the equity markets have been normal in this 11-year-old bull market (especially the sharp pull-backs in the last two years) and have provided nice opportunities to get back in the market. If we break down from these levels, the bigger support for the S&P 500 is at 3000 and the one-year POC (price of control) is close to 2987. It is possible that the current Covid-19 outbreak follows a similar path of previous contagion and remains short-lived; but at this moment I also think investors are pricing in political risk more aggressively. We continue to heed the warning signs in the bond market, as the treasury yields continue to make a lower low and the flight to safety remains the top trade.

As difficult as it may be to stay the course in the face of recent market volatility, long-term investors may want to consider that approach. Based on history, it is possible that we may see a return to pre-outbreak levels of global economic growth, although it may be a tough climb this year and the markets may need some help from government stimulus.

We will continue to monitor the financial market conditions and keep you abreast of further developments. If you still have further questions about your investments, please feel free to contact your Wealth Advisor at Marshall & Sterling Wealth Management.



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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

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