Fighting fear is one of the most difficult tests we humans face. Whether it is corona virus, a plunging stock market, [Your most hated presidential candidate here] occupying the White House in January 2021, or one of countess other things, it is pretty easy to find things to be afraid of. Maybe it is just a perception but for whatever reason, it seems that society today is less able to handle their collective fears. I saw it aptly put this way somewhere:
1941: “We have nothing to fear, but fear itself”
2020: “AAAAAAAAAAAAAHHHHHHHHHHHHHH”
Maybe that’s not entirely accurate. But it sort of feels like it at the moment.
For the purposes of this blog, let’s stick to the financial markets.
The bond market:
*If you are holding bonds at the moment you are doing great – particularly if you are holding long-term bonds. With Central Banks pushing interest rates down, yields are plunging and bonds are soaring.
*But “chasing things” that are moving abnormally well is typically not an investors best move. What is happening at this moment in long-term treasuries is very abnormal and I would be hesitant to chase that move right here.
Figure 1 – Long-term treasuries appear to have achieved “Lift Off” – Be careful here (Courtesy: www.BarChart.com)
*Given that the financial markets are likely to remain volatile for some time, I personally still tend to migrate to intermediate-term bonds due to their much lower volatility relative to long-term treasuries.
The U.S. Dollar:
*Just a reminder that support and resistance levels can be very useful in identifying opportunities – as well as risks. In this article and this article back in 2019 I noted that the U.S. Dollar was running into some serious resistance. I make no claim to have “called the top” (because I never do) but it did appear to be an area of high risk for the dollar.
Figure 2 – The U.S. Dollar (Courtesy: www.BarChart.com)
The stock market:
*Fear is rampant as I write, with all of the major averages plunging and the VIX Index “spiking” higher again.
*Ignore the headlines and watch the previous lows! While the VIX Index is soaring to a new high for this move, the major indexes have yet to take out their lows from last week.
*I am certainly not going to say that it won’t happen. The most likely outcome is continued volatility for a while with almost certainly a test of th recent low and/or even lower lows before the ultimate bottom.
*My point is simply that if you look at the headlines today you will get that “Armageddon Feeling”, despite the fact that – technically speaking – the market is still higher than it was during the end of February plunge.
*Repeating – watch the market and NOT the news!
Figure 3 – VIX Index is soaring…. (Courtesy: www.BarChart.com)
Figure 4 – …but watch the previous lows on SPX (Courtesy: www.BarChart.com)
Energy Stocks:
*My gut still tells me that we are in an area of great opportunity for buying energy stocks.
*HOWEVER, buying in when prices plunging to new lows is not my style. Still, I am paying close attention.
*Reason 1: In this article there is a discussion arguing that the age of fossil fuels – for better or worse – is NOT going to end anytime soon
*Reason 2: Energy stocks are universally loathed as evidenced by the sentiment chart in Figure 5 from www.sentimentrader.com
Figure 5 – Trader Optimism for ticker XOP (Courtesy Sentimentrader.com)
*Reason 3: We are in a period that on a seasonal basis is typically favorable for energy stocks. It may or may not work this time, but the point is that given the current oversold status, the extremely negative sentiment and the time of year, if energy stocks turn it could happen very quickly. So keep an eye open.
Figure 6 – XOP Seasonality (Courtesy Sentimentrader.com)
Summary
Repeating from previous articles:
*Keep your head screwed on straight
*Regarding pandemics and stock markets, adopt a “hope for the best, prepare for the worst mentality”
*If you believe you are overexposed in the market then make a plan for when and what and how much you should sell. Then follow your plan and DO NOT look back in regret
*If you want to put your head in the sand and just hold on forever, fight that urge (the time will come to NOT “ride it out”)
*If you have cash to invest – don’t try to be a hero, but don’t be a total wimp either
Jay Kaeppel
Disclaimer: The information, opinions and ideas expressed herein are for informational and educational purposes only and are based on research conducted and presented solely by the author. The information presented does not represent the views of the author only and does not constitute a complete description of any investment service. In addition, nothing presented herein should be construed as investment advice, as an advertisement or offering of investment advisory services, or as an offer to sell or a solicitation to buy any security. The data presented herein were obtained from various third-party sources. While the data is believed to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information. International investments are subject to additional risks such as currency fluctuations, political instability and the potential for illiquid markets. Past performance is no guarantee of future results. There is risk of loss in all trading. Back tested performance does not represent actual performance and should not be interpreted as an indication of such performance. Also, back tested performance results have certain inherent limitations and differs from actual performance because it is achieved with the benefit of hindsight.
