Turbulence and Air Pockets

Join Chris Perras for the 9/4/2020 edition of Stock Talk!

Chris Perras: Hey, I’m Chris Perras, Chief Investment Officer at Oak Harvest Financial Group here in Houston, Texas. Welcome to our weekly Stock Talk Podcast: Keeping You Connected to Your Money. This week’s podcast is entitled, Seasonal Turbulence and Air Pocket right on cue. The S&P 500 sat this morning around 3,450. The August month-end payday price agnostic index in ETF buying pushed the S&P 500 up to close August at almost exactly 3,500.

Earlier this week, early September panic buying by retail investors into technology stocks in front of Tesla and Apple’s stock splits pushed the market up to a short-term peak on Wednesday of around 3,580. Then Thursday came and someone realized what our team at Oak Harvest had been saying for over two weeks on our podcasts, saying, “Relax, take a deep breath. There will be a better buying opportunity in early October to early November.”

Listeners can go to our website, oakharvestfg.com, and listen to our second half outlook as well as our August 21st podcast entitled Curb Your Enthusiasm: Election Volatility Breeds Opportunity. Yesterday, what happened? Someone woke up and said, “I’m taking some chips off the table.” The S&P 500 dropped almost 4% intraday on Thursday, down 3.5% to 4% is a lot in one day. However, it’s back to where we were 10 trading days ago. That’s it.

As we have stressed for the past few weeks, after five months, the V-bottom rally was long in the tooth. This was right in front of what will likely be a very emotional election period, regardless of who wins in November. This is the third quarter dead zone, no earnings report, just summer macro data which is always a mixed bag, pre-election jitters and noise, lower stock buybacks, insiders getting to sell a stock, lots of supply in stock, and lower demand around.

A lot of my hedge fund friends called me earlier this week and could literally only list positive points to the market, job creation, housing spending, auto buying, earnings from tech companies, virus remedies, and the new kicker, the Federal Reserve is going to do, even more, they’re going to print even more money. The list was lengthy. The problem is this was all old news. The problem was these people were telling me for 1,000 S&P 500 points in four months that the world was going to end, we were all going to die of the virus or we were going into the Great Depression round two. This was right when investors should be cautious short term, not speculating.

Behind the scenes, we are seeing tell-tale signs of a short-term top. The things that lead stocks have been saying for about two weeks are, “Sit and watch, move very slowly. Be patient. Do not be greedy at 3,500 on the S&P 500.” Here is a partial list of those signs. Copper was down, lumber was down. Long-term interest rates were lower, not higher. Listeners, remember my boring bedtime story of Goldilocks and the Three bowls? Do any of the previous indicators scream that I have to go out this week and get long and bold up after five months of straight up?

Oil has been lower, volatility has been up. Bitcoin was down. The dollar was stronger. The Economic Surprise Index broke from its extremely high levels to lower levels and, yes, as I mentioned a few weeks back, the best leading indicator I’ve found this year, bond volatility, started creeping up. We have entered the dead zone of the third quarter. The investment team will be looking at buying opportunities later in the month or in early to mid-October. Why? Because we have been following a very normal election year cycle and seasonality all year, and better yet, while Thursday and today look like short-term shellacking in the markets, it’s probably the most bullish shellacking I’ve seen since August of 2019. Yes, believe it or not, all the red on your screen is bullish longer term.

Listeners and clients, please think all the way back to August of last year, a long, long time ago, in a galaxy far, far away removed from the virus and the 2020 election worries. Way back then, we previewed a normal third quarter sell-off for 2019 which we would be using as a buying opportunity for the late fourth quarter and the 0early first quarter of 2020. That patience and strategy worked out pretty well. The next four to eight weeks should be considered a similar air pocket that creates a real dip in buying opportunity. This dip could approach 9% to 10% from the recent, almost parabolic top tick near 3,585 on the S&P 500 we experienced earlier this week.

If we hadn’t run so far so fast in August, the percent downside at risk would have been even less. Listeners, this is all shorter-term tactical talk. If you’re thinking three to five years, ignore it all. Now, before you panic, run and sell everything that Oak Harvest doesn’t manage for you, I want to remind you, this kind of pullback is totally normal in a hotly contested presidential election. I’ve shared with our listeners in prior podcasts the history of market returns before, during, and after presidential elections. Overwhelmingly, these air pockets have turned out to be buying opportunities when one looks out three to 12 months post the election.

An 8% to 10% pre-election decline would take the S&P 500 almost precisely to? Anyone? Anyone? The rising 200-day moving average calculated later in October and early November. That sits at about 3,250 to 3,285, call it 3,300, and that would be retracing, what? The month of August. That’s it. Yes, listeners, a normal pullback would have investors “giving up 20 trading days in August over the next two months”.

Given our listeners’ and clients’ preoccupation with both the process and outcome of this upcoming November president election, I wanted to share a further data point I’ve recently found. This also seems to triangulate to the same level on the S&P 500 that we’ve talked about for a few weeks here as far as a pullback. A lot of news has been made in the press by the President on one side and the liberal press on the other about the outcome of the election being delayed or unknown the night of the election because of a combination of mailing voting and absentee voting.

Well, stop the presses, unfortunately, yes, this is likely, Why? I’ll tell you. I’ve researched this topic for about four months. What I’ve found is that in 2016, almost 40%, 4-0%, of all votes were not, I repeat, not done in person on election day. How is that possible? Well, many voters vote absentee. Think about all the US citizens working overseas or vote by mail. Given a combination of the pandemic and older demographics, the number of non-in-person voters this year should approach close to 50% of all votes this election, that’s almost half of all votes will not be done the day of the election.

Yes, the odds are that we might not know the true total vote count for a few days. Hopefully, it’s not for weeks till after the election, even if one or both of the candidates declare themselves victor after the in-person votes are counted the night of the election. This is one reason that Facebook just instituted a policy change and won’t allow new political ads a week before the election. This will allow old ads to run but not new ones, like an ad saying XYZ has won the popular vote count and the election and is your president.

Well, I have to call this a big old CF, which is short for cluster– Well, never mind. However, listeners, having researched this, we have seen this happen two times before in the history of the United States during presidential elections. Yes, it’s happened before. First, all the way back in late 1876, which I imagine no one was around, Rutherford Hayes who wasn’t declared victorious until March of next year. That’s an awfully long time to wait. Well, that’s after the inauguration process normally.

Lest do you think this was way too long ago, during that time period, the stock markets declined about 10%, peak to trough, according to data compiled by economist Alfred Cowles. Okay, that was a really, really, really, really long time ago. Let’s say technology and communications have made us have to wait four to five months a very highly unlikely outcome this year. Maybe we have to wait a few days or a few weeks. Life should continue on.

The options market, which as listeners know are forward market indicators we monitor in great detail while not always right have thought all year, even pre-virus, that the short-term risk to the market was early September through mid-October, maybe all the way into early November election period. We are in that time period.

Listeners, the second case of a delayed election result was more recent in 2000 when George Bush and Al Gore had to wait it out until the after Thanksgiving or thereabouts as hanging chad votes were counted in Florida and Vice President Gore contested the outcome. The outcome of waiting on the results back then was that the S&P 500 was down a little over 10% from its peak in late August to Thanksgiving time. However, I remind investors that the economic scenario was much different back in late 2000.

Listeners recall that this was near the end of the internet bubble when the economy was roaring and the Federal Reserve was doing everything in its power to try to slow the economy down and slow capital investment down. Right now, the Federal Reserve is doing everything within its power to speed up the economy and speed up investment. If we triangulate these two previous delayed presidential outcomes to this year, what’s the net result? Well, it’s pretty much what chartists and investors who tracked normal cycles would say. The short-term risk into and out of the election is somewhere between 3,250, and 3,300 on the S&P 500 cash market.

Listeners, this isn’t a crash as some on TV like to throw out there when they talk about big point moves in the markets in the S&P or Dow Jones. In fact, it is only returned to the levels we were at at the end of July and beginning of this August. After warning of the normal timing for the market to roll over for weeks in a recent podcast, which was a late August payday peak, the team at Oak Harvest will continue to be in go-slow mode throughout the dead zone of September into early October.

We should be able to find a plethora of opportunities into late September and mid-October as the late to the five-month rally FOMO crowd, that’s short for fear of missing out crowd, experience another bout of selling and delivering margin calls. The path here has been a turbulent one since the first quarter top in mid-February. We are in the dead zone of the third quarter. We’ll be using higher third-quarter volatility to position portfolios for an uptick in real economic growth in the economy in the fourth quarter of 2020 in 2021 regardless of who is victorious. Why? Because we still believe in the same two things we first started about six months ago when emotions were at a peak.

First, we believe in science leading us to a solution for the virus faster than everyone thought, and secondly, we believe in the mantra, don’t fight the Federal Reserve. We’ve stuck to the mantra, don’t fight the Fed. Fact is behind the scenes of yesterday and today’s sell-off in technology stocks in the overall market, we are already seeing early signs bubbling up of a return to real economic growth and not just inflationary growth in the fourth quarter this year.

There are really early leading indicators saying that after the next four to eight weeks of noise, it’s going to be a very Merry Christmas and a very good New Year in the markets. What listeners can be assured of is if the stock markets follow its normal path of increased volatility into early fourth quarter pre-election, we’ll be using a pullback to add to economically sensitive equities for a stronger economy In late 2020 and 2021.

At Oak harvest, we were comprehensive long-term financial planners. What this means is that as our client, you and your financial advisor should have a financial plan that is independent of volatility in the stock markets. If you are retired or in the process of retiring, give us a call at 281-822-1350. We are here to help you plan your financial future helped smooth the financial path you have into and through your retirement years with a customized retirement planning. Many blessings. This is Chris Perras at Oak Harvest Financial Group.

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