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May 13th, 2020:
We have been extremely patient with this market because I have been expecting another leg lower after a really strong rally off the bottom in March. Although the economy is slowly re-opening, there has been significant damage and the reality is that many things will not be going back to normal anytime soon. There is still fear of additional waves of Covid-19 infection and regardless of what happens, many businesses will continue to experience hardship for the foreseeable future.
I have been showing this chart (S&P 500) for a while now and although things are occurring later than I had initially expected, it appears that another leg down has started. In terms of where we go from here, I think the bear and bull cases are both still a possibility. On one hand, we have the massive fiscal and monetary stimulus packages that so far have been successful at pushing markets higher. On the other hand, the economic numbers are appalling and are unlikely to bounce back for quite some time. To make matters worse, the US and China appear to be playing the blame game over the virus's origin and this has escalated into discussions of sanctions and renewed trade conflict.
I have been using the banking sector as an indicator of sustainability for this rally because bank lending underpins everything in this economy, and the current economic conditions will require increased access to credit in order to get through this difficult time.
In late April, it appeared that banks were going to break above the 50 day moving average but they were quickly rejected. A second attempt from a lower level late last week failed again and now things are moving sharply lower. I won't show the Canadian bank ETF because it looks virtually identical and the reality is that Canadian markets typically take their cue from US markets.
Moving forward I think that most sectors are likely to move lower with the broad markets but I am curious to see how precious metals respond. Gold miners have been by far the strongest sector coming off the bottom and if gold maintains its current bid (or even advances), we could see mining shares hold up fairly well.
I have marked up the chart of the TSX gold mining index to indicate two possible scenarios moving forward. The optimistic case would involve a continued sideways correction and an eventual move upward, whereas the alternative is a correction that eventually finds support and continues upward from there. If the broad market goes on to make new lows, we would have to consider other scenarios but for now we will just watch and see how things play out.
When the broad market does find a bottom (either shallow or deep), initial evidence suggests that renewable energy (utilities), precious metals and certain elements of technology (biotech) are going to be the strong sectors moving forward. The initial stock watch-list that I put together in April has been incredibly strong and once a bottom is achieved, I will be looking to add to current positions in these sectors in both the stock and ETF portfolios.