May 13th, 2020 –

It’s been a nice respite, as the market has worked off the March crash and rebounded back to respectable levels. It’s another good lesson in extremes and also making sure we always remain open minded to the counter argument. I’ll spare you the psychological pleasantries and get right down to my thoughts. 

Despite the current market bounce, we now find ourselves at quite the juncture. I have been at this game a long time and can tell you that this is one of the most dislocated markets I have ever seen. 

Below is a chart of two sectors, two important sectors. The interesting thing about these two sectors is that they’re each telling a story. The one outlined in white is the technology sector, bouncing back to near highs. The green is the financial sector, not too far off lows. 

Now, it’s easy to rationalize this with money flow showing the obvious. If we’re all stuck at home, clearly technology will benefit. If we can’t get to the stores, clearly the online technology retailers will benefit. Yes, I understand all this, but what I don’t like is that the financials are a better reflection of what’s really going on in the economy. 

We now have over 30 Million people unemployed, and at 14.7% we’re at a greater unemployment rate than the Great Depression. 

One of these two charts is wrong, and I believe we’re coming to a decisive point. What I love about our position is the flexibility to remain open minded and objective to either scenario. If the Financials improve, it will signal that we may be at the worst point in the economy and will see a turn. They will give us an all clear signal and I’ll be much more inclined to come off the sidelines. On the other hand, if the Financials are giving us a warning, I sure am glad to be where we are. 

We’ve spent the last few weeks, once again, combing through portfolios and reaching out to ensure that all of our clients are allocated appropriately. We currently have significant cash levels to ride through another correction and be opportunistic when the appropriate time warrants. Until then, we will remain patient and continue to watch the action unfold. 

For those fundamental folks out there, I got a kick from the following chart I put together measuring all the basic metrics of the technology sector, XLK. No, your eyes aren’t deceiving you. In the face of the greatest economic threat our country has faced since the Great Depression, this sector is the most expensive it has been in over a decade. 

Until next time