Stock Market Outlook for March 2, 2020
After a week of outperformance, defense was a significant drag on Friday as the entire market is taken down to a new equilibrium.
*** Stocks highlighted are for information purposes only and should not be considered as advice to purchase or to sell mentioned securities. As always, the use of technical and fundamental analysis is encouraged in order to fine tune entry and exit points to average seasonal trends.
Stocks Entering Period of Seasonal Strength Today:
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Quest Diagnostics Inc. (NYSE:DGX) Seasonal Chart
Avalonbay Communities, Inc. (NYSE:AVB) Seasonal Chart
Black Hills Corp. (NYSE:BKH) Seasonal Chart
United Natural Foods, Inc. (NASD:UNFI) Seasonal Chart
Group I Automotive Inc. (NYSE:GPI) Seasonal Chart
Canon, Inc. (NYSE:CAJ) Seasonal Chart
Cott Corp. (NYSE:COT) Seasonal Chart
Vishay Precision Group Inc. (NYSE:VPG) Seasonal Chart
Pattern Energy Group Inc. (NASD:PEGI) Seasonal Chart
Global X SuperDividend REIT ETF (NASD:SRET) Seasonal Chart
Citigroup, Inc. (NYSE:C) Seasonal Chart
Western Union Co. (NYSE:WU) Seasonal Chart
El Paso Electric Co. (NYSE:EE) Seasonal Chart
Systemax, Inc. (NYSE:SYX) Seasonal Chart
Prudential PLC (NYSE:PUK) Seasonal Chart
Global X MLP ETF (AMEX:MLPA) Seasonal Chart
The Markets
Markets had another volatile day on Friday, capping off one of the worst weeks for equity benchmarks on record. The S&P 500 Index shed 0.8% on Friday, capping an over 11% decline for the week. The Nadsaq Composite closed slightly higher, capping off an over 10% drawdown. The panic that continues to ensue is breaking down every level of support that we had been watching, including last summer’s resistance at 3025, which just a week ago seemed like the worst case scenario. Now the summer low is the hurdle to watch. For the S&P 500 Index, those spring and summer lows of 2019 can be defined as a range between 2820 and 2850. The June low is also a significant hurdle at 2728. The panic often leads to difficulty in identifying levels where the benchmark is likely to stop, particularly given the speed of the decline, which is quite simply unique. But something that we had alluded to on Thursday, the next step is to determine probable levels of resistance that the rebound rally will peak, which will effectively define the timescale that we should expected equity prices to remain depressed. Resistance around the 200-day moving average, around 3046, which the benchmark is firmly below, would imply negative long-term implications, while resistance around the 100 or 50 day moving averages at 3166 and 3265, respectively, would suggest intermediate-term implications. This is not expected to be a short-term “blip” similar to other outbreak events, although the headlines remain highly fluid. In the Seasonal Advantage Portfolio, we took off our hedges on Thursday based on appealing risk-reward entry points to stocks and we still feel comfortable with that decision. The simple fact is that if the market starts to show more signs of resistance than support then we will take aggressive defensive measures, once again. In the middle of the month, ahead of the pullback, we shed risk and took on a position in long-term bonds, a hedge that acted wonderfully when the equity market crashed. Now that we are back in risk-assets, we watch with bated breath for the rebound attempt, however long that may be. Not receiving our updates? Subscribe to our service and we’ll send you regular distributions pertaining to how to position your portfolio in this market.
Just Released…
Our monthly outlook for March provides insight on how to position portfolios for the month(s) ahead.
Highlights in this report include:
- Equity market tendencies in the month of March
- The currency impact on investment portfolio performance into the Spring
- An update on the beleaguered manufacturing sector
- Commentary on the evolution of seasonal tendencies and why the average seasonal profile of the market may shift
- The upcoming seasonal trade in Natural Gas: Is it enticing this year?
- Insight on what you should do with your Precious Metal positions after the big surge during the period of seasonal strength
- What’s next in the seasonal rotation
- The technical status of the S&P 500 Index
- Sector reviews and ratings
- Notable stocks and ETFs entering their period of strength in March
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In our work, virus outbreaks do not factor into our models, although we did take down risk based on deteriorating technical factors during the middle of February. Quite simply, virus outbreaks have historically been a temporary event. You could say that we are redefining what is normal based on recent market activity. Still, comparing what is actually occurring in the market and the economy to what is normal is what we do on a daily basis and, quite simply, we do not have enough data to conclude anything sustainably negative as it pertains to the fundamentals. The market is rampant speculating on the outcome, and that speculation could indeed prove to be correct, but past history dictates that the market does not go down in a straight line and that the fundamental data will ultimately confirm the sustainable trend. So far, economic reports for January and February have been quite healthy, not suggesting anything similar to what we’ve seen in prior intermediate and long-term declining trends in stocks, such as what was seen in the 2001 and 2008/09 recessions. Major tops in markets are typically a process and not an event, preceded by economic strains for sometime prior. While the strains in the manufacturing economy have been thoroughly telegraphed by us for some time, those strains were alleviated with the de-escalation of the trade war between the US and the rest of the world. The consumer is and has been in good shape and any impacts resulting from the virus would be expected to be short-term in nature; there is not the sustainable headwind, as of yet, that would crimp consumer spending over a prolonged period of time. From this perspective, the fundamental prong to our approach does not indicate that we are in a state that longer-term defensive action in the broad equity market is appropriate, but we are certainly keeping an open mind in case the data fills in that way. In our regular distributions to subscribers, we break down the results of how fundamental datapoints relate to average seasonal tendencies and how to determine if they are positive or negative for risk-assets.
Not helping investors on Friday was the fact that portfolio hedges saw massive outflows as investors shed positions now that they’ve done their job. The Gold ETF (GLD) was down by 3.65%. Gold Miners were exponentially worse, falling by 6.86%, touching the lowest levels in around 8 months. Defensive equity sectors were the largest decliners with REITs, Utilities, and Consumer Staples falling by at least 2% on the day as the panic selling brings the broader market back to a new equilibrium. This is predictable of a panic event where the areas that cushioned investment portfolios in the midst of the broader market decline then play catch-up to some of the areas that led the market lower in the first place. Often times, these hedges are the only thing that can be sold at seemingly reasonable levels, making them vulnerable when investors need to raise cash and/or rotate. Fortunately for us, we shed our hedges on Thursday in anticipation of this unwind. The pullback in these defensive areas essentially resets the board market and makes these areas available to us, if need be, should the market start to resist, as alluded to earlier. We provide a sector breakdown and review within our monthly outlook that is available to subscribers.
On the economic front, Statscan released a report on Canadian GDP for December before Friday’s open. The headline print indicated that GDP increased by 0.3% in the last month of the year, resulting in a year-over-year increase of 1.9%. Stripping out the seasonal adjustments, GDP actually declined by 2.5%, which is stronger than the 2.8% decline that is average for December. The calendar year increase was 1.7%, which is weaker than the 2.4% increase that is average. Subscribers can access the seasonal charts for this report at the following link: https://charts.equityclock.com/canada-monthly-gross-domestic-product-gdp-by-industry
Sentiment on Friday, as gauged by the put-call ratio, ended bearish at 1.27.
Seasonal charts of companies reporting earnings today:
S&P 500 Index
TSE Composite
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