October 30, 2020 Enewsletter
Posted on: October 30, 2020
What we are doing to protect the portfolio and to enhance the quality of investments that we own
- Markets have had a rough week due to concerns over the coronavirus, growing uncertainty around the election (both the outcome and over potential disputes), currency and rising debt concerns, and the looming battles with tech giants. Mixed reporting results from companies this week have also had a significant impact.
- The uncertainty from all these news bytes and market volatility has created a pull back from the most recent high of about -7%, as of mid this week. As such, our short-term indicators are well into the Red Zone, however our longer-term indicators are still in the Green Zone but starting to weaken. We have therefore moved approximately 35% of the equity component of the portfolio to defense, which includes bonds, cash, and some alternative ETFs that can perform on the downside. This move to defensive positions has helped to de-risk the equity component of your portfolios, which has only pulled back about -2.2% since the most recent high, compared to the market -7% pullback. This is exactly what our cash strategy is designed to do.
- Should markets fail to hold here, which by the way is only slightly above where the U.S. markets were at the end of 2019, we will likely see our indicators rollover and go full on red zone and our portfolios go fully on defense. We are watching closely.
- Proactive risk management – using our short-term indicators as mentioned above to de-risk the portfolio by moving to defensive positions. This is our leading indicator that helped to protect us back in March of this year, in the September pullback, and over the past couple of weeks. This is not a buy and hold approach that rides the market down.
- Active management – our investment discipline has us analysing the full universe of potential investment option, filtering for the strongest relative investments for the portfolio, this also includes a universe of defensive investment options. Our process helps to identify opportunities and risk.
- Liquidity – We set minimum trading volume limits to ensure the portfolio upholds a high level of liquidity. This improves our ability to find a buyer for weakening positions, mitigating the risk of getting stuck when it is time to sell. Currently, this measure and our volatility analysis have us looking to some particular Exchange Traded Funds (ETFs) to increase our level of liquidity through these uncertain times.
- Stability – The price per individual investment or stock must meet a minimum threshold to ensure penny stocks or investments which tend to have less stability are removed. We also set a yield requirement, looking at consistent returns from through established dividends, to enhance stability.
- Volatility – We track the VIX (Volatility Index) to add further insight into the current state of the market. When the VIX moves beyond typical levels, this is an indicator that there is an increased need for liquidity and proactive management. A measure of 20-25 is on the high side of typical, and we are currently seeing a measure around 38. Furthermore, for each investment that we own, we have a “beta” requirement, measure of risk, to further reduce the volatility exposure in our portfolio and remove more speculative investment options with higher risk parameters.
- The number of coronavirus cases continues to rise. John Hopkins University and Hospital
- Record U.S. third-quarter growth expected; healing from COVID-19 still a long way - The U.S. economy likely experienced record growth in the third quarter as more than $3 trillion in federal pandemic relief spending fueled historic consumer spending, but the deep scars from the COVID-19 recession could take a year or more to heal. Reuters
- U.S. Economy’s Path Less Certain After Record Quarterly Growth - “There looks like there’s still a fair amount of momentum,” said Jay Bryson, chief economist at Wells Fargo & Co. “But there’s a lot of risk right now -- downside risk generally -- as it relates to the re-acceleration of Covid.” Bloomberg
- U.S. States Face Biggest Cash Crisis Since the Great Depression - The drop in tax revenue has led to a total shortfall expected in the hundreds of billions of dollars—greater than 2019’s K-12 education budget for every state combined, or more than twice the amount spent that year on state roads and other transportation infrastructure Wall St Journal
Trading Ranges: The market is in constant search of balance, which means a price where both the bulls and bears feel there is value in placing a trade. They need to believe that they will make money. This means an area of confusion, a trading range, because how else could both the bulls and bears feel that the price is good?
It constantly probes up and down as it tries to determine the fair price area. Most of these rallies and selloffs fail and the market stays within the range. Occasionally one leads to a breakout, which means that both the bulls and bears are no longer confused. They agree that the price is too high in the case of a bear breakout, or too low in a bull breakout. The market then quickly moves to a new area of confusion, which is another trading range, where both the bulls and bears feel that the price is about right.
Tight Trading Ranges: When Most Should Not Trade: When a trading range is tight, similar to how it is now, most traders should not trade. Experienced, aggressive traders will scalp with limit orders, buying below bars in the bottom third of the range and scaling in lower, and shorting above bars in the top third of the range and scaling in higher. However, whenever the range is too tight, they should wait for a breakout up or down. (Al Brooks, October 25, 2020)
And once again we provide comments from our BMO Nesbitt Burns Technical Analyst; Russ Visch:
Daily Action Report - It was a classic "risk off" day yesterday (Wednesday) where equities and commodities all sold off while safe haven investments such as treasuries and the U.S. dollar caught a solid bid. In terms of the price action, the S&P/TSX Composite closed below key support at 15,725. In theory that breakdown opened a new downside swing target of 14,615. It's happening at a time when the TSX is nearly as oversold as it was in late March though. i.e. - this sell-off is very near to being done so a drop below 15,000 seems highly unlikely.
South of the border, our short-term timing model for U.S. equities is not oversold enough to make the call for a trading low just yet but it's getting close. This is in line with our expectation that we won't see a trading low develop until we get to the election next week. Given the state of short-term breadth and momentum gauges though, it also means that our forecast that this correction will likely be no worse than a test of the late September lows (SPX: 3209, Nasdaq: 10,520) is right on the mark.
Normally a "safe haven" asset during true risk off days in financial markets, gold's decline yesterday was related to the fact it's been in the midst of a medium-term correction for quite a few weeks already. There is some support in the $1840-1850 zone but our expectation since August is for a test of the 200-day moving average, which is currently at $1767. In fact, there are multiple support levels in that zone which should contain the weakness. (Silver also looks to be headed for a test of its 200-day moving average, which is currently just under $20.)
Have a great day!
~ John, Kate, Megan & Michelle
As election hype, coverage, and outcome hypotheses flood news outlets, questions about how we will be impacted flood our minds. What does it mean for our investments and our economy? Are there opportunities or risks that we should be aware of?
Over the past couple of months we have done extensive research to help answer some of these questions. In an attempt to share this information in manageable pieces we shared one section of the report each week, along with an audio recording in which we interview subject specialists on the various findings.
Thank you for your feedback on our new podcast initiative. We hope that you found the written articles and audio recordings insightful and helpful in rounding out your existing knowledge.
For future reference, below is a link
to these articles, please feel free to share with other individuals that you think might benefit from the information.
At the top of the website, you will see the full report
and an executive summary
. Further down you will find Part 1-4 of our Podcasts series and the corresponding written article.
PODCAST: Political Insights with Greg Valliere
As we live through one of the most interesting times in recent memory, there is a lot changing in the world and especially with the upcoming elections which is just around the corner.
Listen to the Podcast where you will hear John Ridd speak with Greg Valliere who will offer us perspective on a couple of different themes from his thoughts on the pandemic, geopolitical issues, markets and of course, the election.
See PODCAST: Political Insights with AGF's Greg Valliere
Greg Valliere joined AGF Investments (AGF) in February 2019 as Chief U.S. Policy Strategist. In this role, he is responsible for providing insight into how U.S. politics are shaping global markets. He brings a unique perspective to AGF with over three decades of experience analyzing policy and politics providing regular commentary and insight into Washington for financial services and investment management clients globally, including specialized coverage of the Federal Reserve, economic policy and politics. Greg began partnering with AGF in 2017 advising investment management teams on policy and the impact on global markets, providing daily market commentary for financial advisors and participating in numerous client events and roadshows. Most recently, Greg was the Chief Global Strategist at North Carolina based Horizon Investments, LLC and has nearly 40 years of experience following Washington issues for institutional and retail investors. He is widely quoted in U.S. media and specializes in coverage of the Federal Reserve, tax and spending issues, and politics. Greg is based in Washington, D.C.
Please note: We apologize for the poor Video quality but hope you enjoy the audio.
Global Economy at the Crossroads: Which Way Now?
ECB... Clearly, Clearly, Setting the Stage for More Stimulus In December
U.S. Real GDP (2020 Q3 Advance) — Great Reopening
BoC: The Year of Forecasting Dangerously
Some Treats, But More Tricks, Weigh on Consumer Confidence
Durable Goods Orders ... So Far... Durable
Cdn. GDP: Strong Summer...Feeble Fall?
U.S. Personal Income and Consumption (Sep. 2020) — Still Spending
RIDD & ASSOCIATES WEALTH ADVISORY GROUP
John Ridd, PFP® CIM® FMA® FCSI®
Vice President, Wealth Advisor & Portfolio Manager
Kate Murdoch, CIM® CFP® BCOMM
Investment Advisor & Financial Planner
Megan Lisowski, PFP®
Phone: (905) 727-5040 | Fax: (905) 830-9538 | Toll free: 1(800) 651-5952
BMO Nesbitt Burns – Aurora – Yonge & Wellington
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BMO Nesbitt Burns – Aurora – Bayview & Wellington
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BMO Nesbitt Burns – Newmarket – Yonge & Mulock
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