Searching for opportunities in a sea of declines
Relative strength is a measure that helps investors evaluate investments relative to the general market. By many standards, we are now in a bear market, however, some equity groups have seen relative strength during the midst of constant and dramatic market declines. Understanding these groups could put us in a better position for when the market rebounds.
Broad Market Analysis
First, it’s important to note that the state of the market is serious. Investors are trying to price risks from the coronavirus and related future economic damage. This task becomes significantly more difficult when the federal government misleads on data or can’t settle on a substantial bailout for consumers. The S&P 500 is already down 35% from its all-time high and could go down another 12% from here to reach support at 2,000 (see chart).
A “megaphone’ pattern may be forming which, if true, means a possible rebound from the 2,000 level.^1 In many instances, these patterns result in the continuation of the long-term trend, in this case a bull-market. However, if you are unwilling to wait for a rebound or emotionally or financially can’t handle a further drawdown, then contact me to discuss transitioning to a more conservative allocation.
Bond Analysis
Bonds are usually the safest asset class in the portfolio as they are guaranteed by the issuer at maturity. Bonds suffered along with stocks in an unprecedented way as large investors sold everything they could to cover the margin on losing stock positions. The federal government had a chance to step in to provide additional liquidity in the bond market but has failed to provide an adequate amount. Bonds are likely to recover once market liquidity returns to normal.
Opportunities
Although every company has suffered along with the general market, some appear to have suffered less-so and have strong relative performance, including the technology sector, telecommunications, utilities, industrials, and others. These are cornerstones of the broader market and will plausibly be the genesis of the next recovery.
Final thoughts
There’s no question that this correction isn’t serious nor is it over. An additional drawdown is expected as investors continue to flock to cash. If they need more cash to help offset their losses, they will seek to sell bonds, gold, bitcoin, and anything else that could generate cash. This rash action by some highly-leveraged hedge funds and investment firms have caused significant market damage and reduces the likeliness of a quick recovery. I advise that investors stick to their financial plan, keep a significant cash reserve, and have a long time horizon for any investment that they commit to.
At Eureka Wealth Management, I’ll help you make decisions with regard to managing your investments and keep you up to date with my analysis and recommendations. If you would like to review your portfolio, reduce risk, or otherwise make changes, please contact me at (760) 537-0791 or book a meeting online at eurekawealthmanagement.com.
Sources