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Is there a Silver Lining?

| March 16, 2020

While we are sure to see many bad headlines over the course of the next few weeks to couple months, we do believe that world is now acting out of an abundance of caution. Below is the live chart of reported CV cases. You, of course, will notice that most of the new cases are concentrated in Iran and Italy. Keep in mind that the US hasn’t really started testing to any large degree and you should expect that our numbers will go up significantly over the next few weeks.


If you are of a certain age (let’s say 60 or older), have chronic respiratory issues, or are already in less than perfect health, it is imperative that you practice some ‘social distancing.’ Even if you don’t fit this profile, keeping your distance is wise for the benefit of the community at large. As extreme as it seems, closing businesses, coffee shops, and gathering places in an effort to stem the transmission of this virus, appears to be the most straightforward answer to containing this virus. It’s a small price to pay for the ultimate reward of ‘Flattening the Curve.’


While the cases will spike as soon as testing starts in earnest, so too do we believe the death rate will come down, as most epidemiologists and models suggest somewhere around a 1% fatality rate. That is still several times more deadly than the flu, but not as bad as the fear is now.

Let’s take a look at the markets and where we think we are headed. Keep in mind, that 17 trading days ago (February 19th), the market hit an all-time high. So all this market destruction has happened in a very short window. We are currently seeing metrics we only see around market bottoms with the odds of some intermediate counter-trend rally well above 50%. Does that mean it definitely won’t get worse? No. Does it mean we might get a better price to reduce risk exposure if we need to? Likely. Below is the S&P 500 index chart that I have shown many times before. While the price action looks terrible, several measures of market behavior look stretched to the downside.

Many will of course want to know about the model. How long does it take to move and what does it look like now?  These indicators flipped on Friday to their most conservative position. What does that mean? It means that our model says to overweight cash and fixed income, assuming these levels hold until our next decision point (we make portfolio changes on a monthly basis to avoid unnecessary noise and costly overreactions, especially in turbulent markets like these). Keep in mind that this has all happened in 17 trading days. So it’s not as easy as saying sell and go to cash. I will show you a couple other slides, as the market is very oversold and we would look for better opportunities to reduce risk as needed, rather than indiscriminately selling at the bottom. There’s only one thing worse than going through this market selloff like we have, and that is to turn temporary losses into permanent losses. We will likely be looking for strategic exit points (with the understanding that we could also have a V-shape recovery after the virus issue has wound down).

Above is the NYSE bullish percent indicator. It tells us what percentage of NYSE stocks are controlled by demand (and conversely, which are controlled by supply). What this says is only 6% of stocks listed are controlled by demand. English please! Readings this low only happen at market bottoms and have only happened four previous times. September 1974, October 1987, and October & November 2008. It doesn’t mean it will immediately snap back, but it does suggest that the likelihood of a better market going forward has greatly increased. All four of those previous times were toward the end of the bear market. Could it be different this time? Sure it can. Only time will tell, but to us the data suggests that we could reduce risk at better prices than today.

Here’s one more chart that tells the same story. It shows how many stocks on the NYSE are trading above their 50-day moving average. Spoiler alert, only 2% are trading above. That’s the lowest reading since it started to be tracked back in 1997.

Finally, since so many of us are on lockdown, I thought I would share a University of Texas commencement speech that I think provides good insights. You will have to spend 20 minutes of your life watching the video, otherwise the following won’t make sense.

  • Find someone to paddle with you (we will gladly)
  • Get over being a sugar cookie and keep moving forward
  • Don’t be afraid of the Circus’, they will make you stronger
  • Sometimes you have to slide down the obstacle head-first and take risks
  • Above all else, DON’T EVER RING THE BELL!

We will continue to be vigilant as this virus makes its way through society, knowing that ultimately, we will beat it. We have been so encouraged to say the way this community has responded, and how we are “working the problem” together, even while keeping our appropriate distance. Likewise, we know that markets will have their freak out and yet we must keep our heads about us. We will continue to be cautious, follow our process as we have been, and look for opportunities to both lighten up on risk assets as well as find areas that represent good values going forward. Be safe out there. If you need anything from us – bottled water, toilet paper, hand sanitizer – I will steal them from my neighbor who now has 12 years’ worth of supplies. He’ll never miss it (just kidding, my neighbors haven’t stocked up). In all seriousness, if you need something, we would be happy to help out, even if it’s getting something from the store for you and leaving on the front porch (practicing social distance).

In coming updates, we are going focus on some of the good we expect to come from this – not only because doing so will hopefully bring some light in the darkness, but also because these could represent very attractive long-term investment opportunities. Until then, stay well and know that we’ll continue to work hard to care for what you’ve entrusted to us, so that you can keep your focus on what is most important in these tough times.