Week 14 Sitrep

Everyone wants to know if the selling in the stock market is over and if it’s time to buy again. It is interesting that most retail investors, while not happy about the recent losses, are quite active in looking for a buying opportunity. That is a characteristic about this market leading us to believe this is a market correction rather than the start of a new bear market. U.S. markets experienced their best one-week performance since 2009 last week with the S&P 500 up more than 10%. The year-to-date performance for the index is now down nearly 21% compared to last week’s -33%.1

Source: J.P. Morgan Asset Management, Weekly Market Recap, 3/30/20


Last week’s rally, which continued Monday of this week, looked to be a reversal of the trends we’ve seen since February 19th. While most asset classes delivered consistent returns, the most oversold sectors definitely held the edge. Utilities continue to be a bright spot in the market while real estate and industrials had returns over 15% last week. Large growth continues to be a resilient investment for the year down nearly half the other asset classes. We have noted in prior week’s missives that it is unusual for large growth to be the best relative performer in a down market. Lower valuations and higher dividends traditionally lead large value to be a safer place to invest when prices move lower.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 3/30/20


We continue to see research summaries regarding the severity and speed of the recent decline in stock prices. While the overall price reduction does not match the most recent bear markets in 2008-2009 or 2001-2002, the rapid descent in less than four weeks is unprecedented. There is much speculation as to whether last Monday, March 23rd, will be recorded as the bottom of this downturn; the markets were down 33.9% at that point. Markets that experience this much of a decline do not always bounce back immediately. Bespoke Investment Group reports that the average performance from the bottom of a 30% decline in prior markets  is only 3.7% after six months with a wide range of potential outcomes.2

Source: Bespoke Investment Group, The Bespoke Report, 3/27/20


Despite the terrific returns last week, the indexes are showing some signs of waning on the upswing. Technical analyst Andrew Adams of Saut Strategy reports that the S&P 500 is struggling to get past resistance at current levels. Evidence for the faltering increase is the lack of participation on the upside for many stocks. Adams noted that only 53% of the volume on Monday’s rally was on the upside.3  Many anlaysts we follow are expecting the market to bump against this resistance and fall slightly before we see a sustained rally.

Source: Saut Strategy, Andrew Adams Trading Flash, 3/31/20


One consistency since February 19th has been the daily occurrence of volatility. Recall that the S&P 500 rose consistently from October until January without seeing a single day with a 1% move in either direction. Since the last all-time high, there have been a record number of days with extremely heightened volatility. We have become accustomed to seeing 2-5% moves in a single day in both directions. The measure of volatility used most commonly by stock analysts is the VIX index. As shown in the chart below, the VIX remains quite high despite the better returns over the past week. This is another sign that markets may not be returning to the late-2019 ways anytime soon.

Source: Bespoke Investment Group, The Bespoke Report, 3/27/20


We all understand the outcome of the rise in volatility and the quick decline in stock prices has left many wondering what is next. The S&P 500 Index continues to trade significantly below its recent trend. We often discuss the 50-day moving average as a trendline worth watching. According to Bespoke Investment Group, the index has now recorded the longest streak of days in “oversold” territory.4 The oversold territory is regarded as trading at least one standard deviation below the 50-day moving average. A brief study of statistics shows that we are reaching a higher probability of seeing the index adjust by either the 50-day moving average going lower or the current index price moving higher.

Source: Bespoke Investment Group, Chart of the Day, 3/31/20


Our market indicators remain in positive demand mode on a long-term basis although we anticipate some changes with the close of quarter this week. The long-term indicator reflects the bull market that started in July 2016 is still in effect. The underlying determinants of that indicator tell us that investors still see U.S. stocks as the better place to be for now compared to their international counterparts. The short-term indicator actually saw increased demand from multiple different subsectors in the markets last week given the better performance.

U.S. interest rates are trying to find stability. The 10-year U.S. Treasury bond closed the week at 0.72% and has traded within 10 basis points in either direction for a week. That is a stark contrast to the middle weeks of March when the 10-year Treasury recorded an all-time low at 0.31% and then rose to 1.16% just five days later. Many bonds, including municipal bonds, have seen dramatic price adjustments in the last two weeks. We anticipate the promise of the Federal Reserve to actively participate in bond market purchases, both government and corporate, will bring price stability to bonds of all types.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 3/30/20


Finally, the energy sector is significant for most of our readers given our proximity to the “oil & gas capital of the world”.  We have seen tremendous disruption in the industry with the news that Saudi Arabia and Russia could not agree on a production output earlier this month. The impact on energy company stock prices has been atrocious and the price of WTI crude continues to trade below its average price since 1982 ($42.10).5 Bespoke gathered a number of characteristics for a broad energy sector ETF (XLE) that we thought would shed light on how bad it’s been. The key question we all want to know is when it will reverse. Unfortunately, there is no easy answer as the macroeconomic environment for dollar-based commodities remains tight. Inflation expectations remain muted, the U.S. dollar continues to rise against relative currencies around the world and the expectation for stronger demand of oil & gas is no where in sight. Most analysts favor the large, integrated companies in this environment but do not expect to see significant growth in the foreseeable future.

Source: Bespoke Investment Group, The Bespoke Report, 3/20/20


If you’d like to schedule a time to discuss your portfolio or the markets in detail, please feel free to call our office at (281) 616-5935 or send an e-mail to cameron.malott@engravewealth.com. We welcome the opportunity to sit down with you and learn more about your situation so we can help you optimize your portfolio to meet your financial goals for years to come.

Engrave Wealth Partners Investment Committee

Bill Day, CFP®, CIMA

Taylor Parker, CFP®

Greg Parker

1. J.P. Morgan Asset Management, Weekly Market Recap, 3/30/2020
2. Bespoke Investment Group, The Bespoke Report, 3/27/20
3. Saut Strategy, Andrew Adams, Trading Flash, 3/31/2020
4. Bespoke Investment Group, The Bespoke Report, 3/27/20
5. Bespoke Investment Group, The Bespoke Report, 3/27/20