“Don’t try hard to explain, but try hard to prove it.” – Abhiyanda B
Observers of the market have long been divided between those who believe the stock market is a mirror reflecting the image of the state of the economic and financial environment to the world, the fundamentalists, and those who believe the market ultimately contains within itself its own explanation of market movements, the technicians. Fundamentalists speak in intelligible terms about economic growth, increases in corporate profits etc. Technicians speak a language of their own employing phrases such as daily moving averages, support and resistance and other such esoteric terms.
September was a month that market technicians live for. In late April, almost one month to the day from the market low in March, the S&P 500 broke above the average level of its past fifty trading days and while coming close to trading below that level in late June it passed that particular test and the market continued onwards and upwards reaching its high for the year on September 2nd. From that point, the market experienced its most notable decline in the past six months falling 9.6% by the market close on the 23rd. The market then recovered modestly by almost 4%, sufficient to lift the market back to, guess what, its nearly exact fifty day moving average. Technicians view this as “the classic sign of a coiling market” meaning that in the very near future the market will likely reveal its trend for the next several months by either successfully clearing that level which is referred to as “resistance” (akin to a ceiling) after which the market likely continues to move higher and that level transforms itself into a “floor”, a level below which the market is unlikely to decline below, or the market will decline further and that level will become a “ceiling” for the market while it works its way lower. Pretty exciting stuff, right?
Back in the real world of earth, sun and sky the economy continues to mend quite nicely. The “glass half empty” crowd pointed to the non- farm payrolls increase of 661,000 for September as a disappointment but furloughed public school teachers, the numbers for whom appear in the public payrolls figure, obscured the good news of an 859,000 increase in private sector payrolls, a BETTER than expected number representing a 54% recovery of those jobs lost due to the COVID shutdown. The ISM manufacturing index number released on October 1st also offers evidence of a continuing strong economic recovery. The “half empty” crowd will counter that unemployment benefits are about to terminate and the likely absence of a COVID virus vaccine this year. Nonetheless, the balance of evidence reveals that the V-shaped recovery lives and will get stronger before it doesn’t.
Market participants get to choose their headlines. September was the weakest for that month in almost ten years with the S&P declining 3.80%. Nonetheless, the S&P was up 8.93% for the 3rd quarter and with its following a strong 2nd quarter, the market has experienced its best two-quarter performance since 2009. The smart trade for the month with perfect hindsight would have been to sell one’s winners and add the proceeds to one’s losers, excepting the woebegone energy sector which wouldn’t have any news if it weren’t for bad. S&P growth stocks were down 4.7%, twice value’s 2.40%, though growth is up 20.6% for the year while value is down 11.40%. Foreign developed and emerging markets also outperformed, falling back “only” 2.20% though both are negative for the year 5.24% and 1.97% respectively. Bonds did their job by returning approximately 1.50% for the month offsetting the 3.30% negative equity return leaving the typical 60 equity 40 fixed income portfolio -1.78% for the month and positive 3.80% for the year.
Mark H. Tekamp
October 3, 2020