Contact Us    855-RIA-PLAN (855-742-7526)

TPA Analytics: 4-Scenarios & How To Position For The Aftermath

By Jeffrey Marcus | May 11, 2020

HOPE FACTOR, LONG TERM TRENDS, 4 SCENARIOS, AND HOW TO POSITION FOR THE AFTERMATH.

The S&P500 is now up 30% from its low close on 3/23; 6 weeks ago. What are TPA clients to make of this?  On the one hand the market was severely oversold on 3/23; having fallen 33% in a little over 1 month, with many stocks having fallen much further than the benchmark index; the Russell 2000 (small cap) fell over 40% from its February high to its March low.

As TPA will discuss in this report, the percent of Russell 3000 stocks in a defined long term uptrend, defined by 50DMA above the 200DMA, has fallen to a 10-year low of only 8.69%. This is representative of a very technically weak market, but also representative of an extreme that could be a long term inflection point.

TPA is wary of the market at this juncture, but recognizes that the unprecedented programs put into effect by the government may be able to counter the huge negative impact from the Covid-19 shutdown. 

The S&P500 is at a critical inflection point as shown in charts 1 and 2.

  • Chart 1: having rallied very fast from the 3/23 low, the S&P500 fell below its 5-week uptrend line last week
  • Chart 2: it is difficult to understand how to discount the fact that the S&P500 broke down below its bull market long term trend in March.  This was an uptrend upon which the market had relied for 11 years.

S&P 500 – daily

4-scenarios and how to position portfolios for the aftermath., TPA Analytics: 4-Scenarios & How To Position For The Aftermath

S&P 500 weekly – since 2009

4-scenarios and how to position portfolios for the aftermath., TPA Analytics: 4-Scenarios & How To Position For The Aftermath

In this report, TPA will examine:

  1. How to interpret the market’s positive reactions to EPS so far this season.  A phenomenon TPA told clients to watch for in the 4/6/20 World Snapshot.
  2. Evidence of investors using hope over fundamentals – TPA’s 4/16/20 Beaten-Up stock portfolio Crude down 58% this year.
  3. BIGTECH still pulling the benchmark indexes higher
  4. TPA’s defined uptrend’s falls to a new 10 year low.
  5. Experian’s 4 possible scenarios and where to be invested whether or not there is a broad rally from here

EARNINGS SEASON SO FAR

In the 4/6 World Snapshot, TPA told clients to carefully monitor how stocks prices reacted to EPS.

“Clients should, however, pay close attention to how stock prices react to bad news. If the declines are modest or if stocks show resilience and rise on bad news, this could be a signal that much of the bad news has been discounted – at least for the intermediate term. For an overall pulse of the market, clients may want to pay more attention to price action than what is actually said by CEO’s, who may have no better idea of what a Covid-19 future holds than anyone else.”

The 2 tables below show that whether one looks at average earnings growth (-9.24%) or average earnings surprise -0.86%, the price reaction was positive in almost every sector. This shows that investors are either looking past the present situation, or they are simply ignoring the bad news in front of them. Either way, the bias is to buy stocks. 

This message coincides with what TPA told clients in the 4/20 World Snapshot, “…what really matters, for the stock market, is whether or not money stays in stocks and the evidence of mass liquidations by investors has not emerged. As long as investors, who have their money at invest managers, do not sell stocks cannot stay down.”

There has been no sign of mass liquidations, investment managers will do what they are paid to do – own stocks.

1 QTR REPORTED SALES AND EARNINGS GROWTH AND 1-DAY PRICE REACTION

4-scenarios and how to position portfolios for the aftermath., TPA Analytics: 4-Scenarios & How To Position For The Aftermath

1 QTR REPORTED SALES SURPRISE AND EARNINGS SURPRISE AND 1-DAY PRICE REACTION

4-scenarios and how to position portfolios for the aftermath., TPA Analytics: 4-Scenarios & How To Position For The Aftermath

4-scenarios and how to position portfolios for the aftermath., TPA Analytics: 4-Scenarios & How To Position For The Aftermath

HOPE OVER FUNDAMENTALS

On 4/16, TPA made the case for stocks that were so beaten-up on a long term basis, the probability of higher prices far outweighed further losses. The table and below shows the performance of these stocks since 4/16.

The average performance of the beaten-up stocks has been +27.71% versus the S&P500 +4.65%.  TPA has highlighted the Energy stocks because they are up significantly even though Crude is still down 58% this year. The fundamentals for the Energy sector are far from good at this juncture, yet hope reigns.

4-scenarios and how to position portfolios for the aftermath., TPA Analytics: 4-Scenarios & How To Position For The Aftermath

TPA’S BIGTECH INDEX

TPA’s BIGTECH Index (the largest 8 stocks in the NASDAQ 100) is now up 14.38% in 2020, while the S&P500 is down 10.83%.  Since the market’s high on 2/19, BIGTECH has outperformed the market by 14.67%. BIGTECH’s market cap represents about 15% of the S&P500. 

As will be discussed shortly, BIGTECH is also in areas of the economy that will be less affected by the Cofid-19 shutdown.  Still, the huge discrepancy between the benchmark and BIGTECH means that these 8 stocks are still doing a lot of heavy lifting.

RELATIVE PERFORMANCE – BIGTECH, TECH, S&P500 – 2020 YTD

4-scenarios and how to position portfolios for the aftermath., TPA Analytics: 4-Scenarios & How To Position For The Aftermath

RELATIVE PERFORMANCE – BIGTECH, TECH, S&P500 – SINCE THE 2/19/20 HIGH

4-scenarios and how to position portfolios for the aftermath., TPA Analytics: 4-Scenarios & How To Position For The Aftermath

TPA’S DEFINED UPTREND’S FALLS TO A NEW 10 YEAR LOW

TPA monitors the percent of Russell 3000 stocks (98% of U.S. publicly traded companies) that are in a defined uptrend as defined by the stock’s 50DMA trading above the 200DMA. This means that near term prices on average are trading higher than longer term prices or the stock is headed higher on average.

TPA has monitored the percent of Russell 3000 stocks in a defined uptrend for over 10 years. On Friday that percentage stood at 8.69%, which is the lowest reading in 10 years. What does this extreme mean? On one hand it tells clients that very few stocks are pointed higher long term, which is bad. However, it is also an extreme, which means it may be a valuable long term inflection point.

To decide which matters most, TPA will be monitoring how long it takes the number to bottom. The chart below shows bottoms for the measurement over the past 10 years. The table that follows shows the length of time it took the measurement to bottom after the S&P500 low. The average for the past 6 cycles was 42 days.

We are now at day 46 since 3/23. To be bullish we would want the measurement to bottom soon and certainly we would not want to see a stalled recovery in the measurement. TPA clients can monitor the percent of stock in a long term uptrend in the Trend Barometer each week.

4-scenarios and how to position portfolios for the aftermath., TPA Analytics: 4-Scenarios & How To Position For The Aftermath

4-scenarios and how to position portfolios for the aftermath., TPA Analytics: 4-Scenarios & How To Position For The Aftermath  4-scenarios and how to position portfolios for the aftermath., TPA Analytics: 4-Scenarios & How To Position For The Aftermath

EXPERIAN SEES 4 POSSIBLE OUTCOME CASES

Finally, TPA presents information from a recent Experian presentation in which its economists laid out 4 possible cases for a U.S. economic recovery.  They range from bullish (V-shaped) to bearish (W-shaped).  These cases are defined below.  The chart that follows looks at GDP, GDP growth, and unemployment in each of the scenarios.

V-shape recovery

“In levels terms, lost output in the first half of 2020 recovers over the second half of the year and the economy gets back on track quickly with little scarring.”

Delayed V-shape recovery

“In levels terms, recovery will begin in the second half, with the impact concentrated later in the year and into 2021. The economy will return to it’s pre-crisis level in 2022. The scarring to the economy is more palpable in this scenario, as extended restrictions delay the recovery and lower the effectiveness of the support programs.”

U-shape recovery

“Output levels in case 3 reflect a relatively sluggish recovery and deeper scarring impacts. The combination of an extended period of lock down and layering on of an additional shock related to a marked tightening in credit conditions produce significant additional strain, stifling of business investment and consumer confidence.”

W-shape recovery

“Output levels see less of a hit in 2020, but ends up below the other cases because of a slower recovery. The economy rebounds in Q3, but a resurgence in virus infection rates results in a second lock down in Q4. Fiscal measures expire or become less generous. Credit conditions tighten and along with a persistently high unemployment leads to a plummet in consumer confidence. Activity remains subdued in 2021 until a vaccine is secured. It takes the economy almost a decade to return to pre-pandemic levels.”

http://go.experian.com/look-ahead-2020-macro-econ-webinar

EXPERIAN 4 CASES

4-scenarios and how to position portfolios for the aftermath., TPA Analytics: 4-Scenarios & How To Position For The Aftermath

TPA feels that the most important point from the report for investors is what sectors and subsectors to focus on as the economy continues to feel the effects of Covid-19 and the shutdown. Experian looks at it in terms of net job losses, but this is also telling in terms of business impact.

Leisure and Hospitality will continue to feel the worst effects of the crisis.  Healthcare services, Business services, Retail trade, and Construction will also be negatively affected. On the other end of the spectrum, Government, IT, and Utilities will either be less affected or positively affected.

The table may be a roadmap for investors during the pandemic. Be positioned away from those stocks most negatively affected (Leisure and Hospitality, Healthcare services, Business services, Retail trade, and Construction) and focus on those sectors and sub-sectors that are either better positioned to withstand the storm or may even benefit from it (IT and Utilities).

4-scenarios and how to position portfolios for the aftermath., TPA Analytics: 4-Scenarios & How To Position For The Aftermath


4-scenarios and how to position portfolios for the aftermath., TPA Analytics: 4-Scenarios & How To Position For The Aftermath

4-scenarios and how to position portfolios for the aftermath., TPA Analytics: 4-Scenarios & How To Position For The Aftermath

Talk with an Advisor & Planner Today!

Jeff Marcus founded Turning Point Analytics (TPA) in 2009 after 25 years on trading desks and 13 years as a head trader to provide strategic and technical research to institutional clients. Turning Point Analytics (TPA) provides a unique strategy that works as an overlay to clients’ good fundamental analysis. After 10 years of serving only large institutions, TPA now offers its research services to mid and small managers, RIA’s, and wealthy sophisticated individuals looking for a way to increase their returns and outperform their peers.

Subscribe 2 Week Trial
Customer Relationship Summary (Form CRS)

2020/05/11
> Back to All Posts