Investment Update: May 1, 2020
We hope you are doing well and staying safe.
First, a quick observation of today’s decline of 622 points or (2.55%) on the Dow Jones Industrial Average. While certainly a worrisome day, the Dow was essentially flat for the week – down 51 points or (0.22%). It often helps to take a step back for another viewpoint.
As noted in past Investment Updates over the years, Affinity Capital uses a variety of tools to manage client portfolios. Many money managers classify themselves as “Value” or “Growth” or even “Fundamental”, “Quantitative” or “Technical” managers. We will avoid a lengthy discussion of these classifications while simply stating that we use a variety of these methods to seek a consistent long-term strategy.
Technical analysis uses statistical data such as price trends and levels of market activity to evaluate market sentiment. It attempts to measure whether there are more buyers or sellers in the markets and their commitment to higher or lower prices. Using the Dow Jones Industrial Average, we often mention target or watch areas. These are derived from technical analysis. They are useful in rebalancing your portfolios and to also communicate our short-term viewpoints to offset the day-to-day media hype.
The Dow closed today at 23,723. It previously enjoyed a positive note by rising above the key level of 23,700 reaching as high as 24,750. Remember, the low in March was 18,200.
Although there are numerous variables going forward let’s look at three very basic scenarios.
- As mentioned above, the rise above 23,700 was a positive for the market and this pullback is a combination of factors from daily news items and/or responses from investors that are repositioning. It may regain its footing and continue to move higher.
- We have often discussed the fact that the markets do not move in straight lines. It is akin to variations of two steps forward and one step back.
- Let us try this – it requires some visualization:
Over a given period of time the markets trade within a range of one to ten.
1: The market moves up from 1 to 10
2: Down to 2 and back up to 9
3: Down to 3 and back up to 8
4: Down to 4 and back up to 7
5: Down to 5 and back up to 6
The market is consolidating to a narrow range of 5 or 6 as it gathers more information as to whether sentiment is positive or negative. The Dow started this ascent at 23,450 to a peak of 24,750. In a textbook situation it would narrow to the 24,000 area and then break one way or the other.
While we would prefer to see some semblance of this scenario, it would likely be much more disjointed given current events. Regardless, we see 23,700 to 23,450 as key levels to maintain on the downside.
- The market continues down past the 23,500 level and we continue to rebalance. Even if this occurs, we still expect the markets to recover back to these levels. We are confidently mid-term bullish with obvious short-term concerns. We are confidently long-term bullish.
We prefer to see the second scenario play out in some fashion but regardless, as long-term investors, we feel we are well-positioned going forward.
As always, please feel free to call us to discuss your portfolios or any areas of financial concern. We appreciate the opportunity to serve you.