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Knowing Thy Self

Knowing Thy Self

| March 05, 2020

My initial title to this piece was a witty reference to the song “My Sharona”, as it rhymes with a certain headline we’re all being inundated with at the moment.  But I was told by “close advisors” that it might be a bit uncalled for, given the circumstances.  No fun, but they’re probably right….

Ok, digressing already.  Pushing up the release of our quarterly commentary for Q1 due the rather extraordinary events of the opening two months of the year.  So much for our prediction of 2020 being “a rather ho-hum year in all likelihood”.  Instead, it seems all hell has broken loose….

Bringing back a little “technical analysis” this time around.  The “technical analysis” remains in quotes as any “true technician” would likely claw their eyes out with the simplicity of this analysis.  That said, my now 25 years of experience (how is that possible…) tells me there a few “patterns” that are more important than others – none more important than simple trend lines.  More on that in just a bit.

Not surprisingly, we are hearing two questions over and over these days.  The first is, “is it time to start buying?”  The fact that we hear this question more than the other confirms our initial belief that fear has not yet penetrated the investing landscape.  Not even close.  The second is more of a comment rather than question, and begins something like “oh shit….”.  I’m sure virtually everyone reading this has had one or the other (likely both) enter their mind – so our goal is to tackle both with the information we have available to us.

Let’s begin there – with the information we have available.  First disclaimer – neither Dave or I are doctors.  That is an understatement.  We would actually tell you to give more credence to your favorite Wall Street Bank’s year-end S&P target than any medical opinion that we have in this piece.  For those who have been reading along, that should say a lot. 

Second disclaimer – the epicenter of the Corona is somewhere in the middle of China.  Which also means that the largest sample of data we have about the virus and it’s effects are coming from China.  Now I don’t know about the rest of you, but we don’t have a whole lot of confidence that China has / will be supplying the most “accurate” data on the topic.  I hope we are wrong on that.

The point of both are that we are left with two choices.  We can lie to you, and say that “this is going to turn into nothing” or “get to Costco and hunker down, the world is coming to an end!”.  Instead, we will of course decide to opine on the information that we have on hand – while pointing out that this is an extremely fluid situation that no one can possibly predict with any level of certainty.

With that out of the way, let’s get down to it.  Seems prudent to reiterate what we have pounded into your head in virtually every meeting, newsletter or call over the past several years.  In short, it’s our opinion that we are in the midst of another “Fed-induced, asset bubble”.  This is important because – if we are correct – virtually anything can serve as the catalyst for bursting of said bubble.  We would have guessed the Fed finally raising rates in any sustained fashion, but an unknown virus turning into a global pandemic would likely also do the trick.  That is important for context. 

But as you are about to see, we are not prepared to definitively call this “the beginning of the end”.  Let’s dive into the charts:




It always fascinates me how these things play out.  If you recall our last dive into the world of chart-reading, you will remember the discussion about “double-tops” and “previous resistance now serving as support”.  A look at the chart above shows both.  What we see with that red line is the “double-top” that formed toward the end of 2018 when the market nose-dived from record highs and then recovered quickly after the Fed (once again) reversed course.  Once we broke through those levels, there would be good reason for that to become support.

Almost remarkably, look where the S&P closed at the lowest level as the Corona carnage started last week – exactly at that support level (2954 on the S&P to be exact), and which point we bounced higher and have not yet (as of this writing) re-tested.  And I’m sure you are all now shocked to hear that – since hitting that support level – the Fed once again came out and cut interest rates.  This time a full ½ percent, and in between scheduled meetings.  The markets are pricing in an additional 25-50 basis point cut a couple of weeks from now at the scheduled Fed meeting.

I don’t know if I’ve mentioned this previously, but the markets really like Fed rate cuts.  I mean, they really like them.  So if we look at the chart above, consider the Fed is back in the mix – and then assume the Corona ends up a “nothing-burger” (a wildly huge assumption) – you could make the case that the carnage ended last week, and we can march higher from here.  That is your positive case.  I’m not saying that we subscribe to that best case, but it’s most certainly a possibility.

Let’s take a look at a longer-term trend line:


Most of the “real technicians” that we see trotted out on TV daily keep talking about 2850(ish) on the S&P as their key technical level.  I don’t give much credence to these discussions when they start babbling about “Fibonacci levels” and the like – but it is interesting that their levels match up pretty well with a longer-term trend line, which I do care about.  So, from a purely “technical standpoint”, we will agree that 2800-2850 on the S&P should be the next level of support should we break through last week’s lows (which we are currently as I write this).  We will use this as our next, best-case scenario – that we hold above 2800ish on the S&P, the Fed cuts again (those are likely one in the same), and the Corona ends up being a temporary nuisance.

If we were to break below those levels, we are officially in the “wild west” as far as we are concerned – at least from a technical standpoint.  We will save that for a future update as warranted….but it very well could get ugly if it occurs.

Which brings us to the question you are all asking – is it “time to buy”, or should you be saying to yourself “oh shit….”?  The answer, in our opinion, is neither.  We do not practice – nor do we recommend – short-term trading strategies designed with the false assumption that one can accurately time the next 100 point move in the S&P.  Instead, we are much more focused on the macro environment overall.  So let’s revisit our view on the current environment.

First, we are in the midst of a now decade-long manipulation of the economy / markets (one in the same) by the Fed using both short and long-term interest rates as stimulus for the country to continue spending money it doesn’t have.  This shows in corporate earnings, it shows in debt levels, it shows in stock buy-backs and it shows in the $25 trillion in US Government Debt.  We also know that the Fed has been doing this – albeit not as egregiously – for some 30 years now.  Furthermore, we know that short-term rates are once again approaching zero – and now, even longer-term rates are approaching the same.  In other words, the Fed is nearly out of bullets.

The US is also in the midst of the longest period in history without a recession.  Call us cooky, but we don’t think that we have magically become recession-proof.  And now, we may or may not be looking at a global pandemic that could potentially bring the global economy to a screeching halt?  So no, I will gladly pass on your offer to buy more stocks at the moment.

Now, hopefully we have also explained previously as to why we may look back on this exact moment as yet another “great buying opportunity”, courtesy of the Federal Reserve – at least for the short-term.  This leads us into the second question you may be asking (I’ll say it less crudely this time) – “should I be selling all of my stocks”?

Unsurprisingly, our answer is once again a resounding “no” – and for basically the exact same reasons.  Maybe this does end up being a great opportunity.  Maybe the Corona does in fact end up being “nothing”, and the market uses these new Fed cuts to rip higher to new, all-time highs.  Wouldn’t be the first time, not by a long shot.  If that ends up happening, what do you then do while you are sitting in cash – now once again earning “nothing” thanks to the Fed?  In summary, if you are responsibly allocated to start with, you should not be making “all-in” or “all-out” decisions based on anything.  Ever. 

Now what you are likely hearing less about on the news – but is truly the most fascinating (and somewhat frightening) occurrence of late – is the move in interest rates.  A 10-year treasury is currently sitting at 0.73%.  Let me spell that out.  Zero.  Point.  Seven.  Three.  Percent.  This means that if you were to lend your money to the government for 10 years, they are willing to pay you 0.73% interest per year.  Pretty good, huh?

Any of you that were not day-dreaming during our year-end meeting (probably very few) know that the plummet in rates is not at all surprising to us.  What is surprising, however, is how quickly we got there.  The old adage goes “the bond market will tell you before the stock market does”.  We’ve tended to agree with that sentiment through the years, though all the Fed manipulation makes us somewhat question the current validity.  Either way, there is likely a reason you see stocks seemingly react to the interest rates and not the other way around.


Well, the long-term trend line for rates is certainly in tact!  And keep in mind that – as mentioned previously – the 10 year yield currently sits a full 25 basis points lower than the chart above at 0.73%.  For this reason, it is bonds – and not stocks – that we are currently spending the majority of our mental capital on.  On one hand, there is still at least some room left between here and zero.  On the other, there is a whole lot more room higher than lower.  Keep in mind that bond values rise as interest rates fall, and vice versa.  In other words, it is these same bonds that have you looking at your statements the last couple weeks and thinking “huh, this isn’t that bad”.

As of this writing, we are deciding to keep our current strategy in place – although this could literally change at any second.  For the sake of getting this update out in a timely manner (and for your sanity in reading this far), we are going to save a more detailed analysis of the fixed income strategy for future updates.  But as always, don’t hesitate to reach out of you would like a refresher sooner… know how much we love talking about this stuff!

We can never say this enough – thinking that one is going to make more money by “timing” markets is the easiest and best way forward to financial ruin.  Instead, please understand what it is that you specifically are trying to accomplish.  Have a financial plan.  If your financial plan tells you that you should be set for life, even at lower rates of returns – why would you ever put yourself in a situation to ruin that plan by chasing returns unnecessarily?  Make sure to understand what you own, especially the risks involved.

It is always more important – and much more difficult during good times – to consider risk properly before it presents itself.  Understand your overall investment strategy, and why it is appropriate for your own, specific situation.  Ask yourself, if your portfolio did “xxx”, how would that affect your lifestyle?  Let those answers be the guide to your investment strategy, rather than any short-term event in the news.

If you’ve done all of these things properly ahead of time, our hope is that you turn on the news this weekend and simply find yourself humming a certain, catchy tune by the Knack…..

To all of our clients, as always, we can never thank you enough for the trust and confidence you have placed in Round Hill.

Douglas Brymer                                                                          David Swanson

President & Wealth Advisor                                                         Principal & Wealth Advisor

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