RIA PRO: Market Vaccine For Virus Is More Fed’s “NotQE”

By Lance Roberts | February 8, 2020

, RIA PRO: Market Vaccine For Virus Is More Fed’s “NotQE”


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, RIA PRO: Market Vaccine For Virus Is More Fed’s “NotQE”


Catch Up On What You Missed Last Week

, RIA PRO: Market Vaccine For Virus Is More Fed’s “NotQE”


Market Vaccine For Virus Is More Fed 

Last week, I asked the question of whether the “correction was over?” To wit:

“On a very short-term basis, there is a potential for a reflexive bounce. If your ‘investment duration,’ or rather your ‘investment holding period’ is very short, there may be a ‘trading’ opportunity for you.”

Well, that bounce came hard and fast during the first half of the week, as the S&P 500 rebounded off the 50-dma to set new highs on Thursday. 

, RIA PRO: Market Vaccine For Virus Is More Fed’s “NotQE”

The Good News

As noted, the market bounced firmly off the 50-dma and rallied back to new highs on Thursday. While Friday saw a bit of retracement, which isn’t surprising given the torrid move early in the week, the “virus correction” was recovered. Importantly, the “buy signal,” in the lower panel, was close to registering a “sell signal.” The sharp early-week rally kept that signal from triggering, which would have confirmed the “sell signal” in the top panel. Historically, when both “sell signals” are triggered, deeper corrections have tended to follow.

The Not-So-Good News

Previously, we discussed that we had taken profits out of portfolios as we were expecting between a 3-5% correction to allow for a better entry point to add equity exposure. While the “virus correction” did encompass a correction of 3%, it was too shallow to reverse the rather extreme extension of the market. The rally this past week has reversed the corrective process, and returned the markets to 3-standard deviations above the 200-dma. Furthermore, all daily, weekly, and monthly conditions have returned to more extreme overbought levels as well.

, RIA PRO: Market Vaccine For Virus Is More Fed’s “NotQE”

Of course, the reason for the rally was more liquidity from the Federal Reserve. 

, RIA PRO: Market Vaccine For Virus Is More Fed’s “NotQE”

While the economic impact from the virus is likely to be substantial, as discussed previously, traders looked past economic realities. They focused instead on more liquidity being pumped into the markets by both the Fed, and the PBOC (Peoples Bank of China).

“The PBOC decided that instead of unwinding the large liquidity provision, they would double-down on it… and that they did in size. The last four weeks have seen China supply over CNY2 trillion (net!) into its financial system – something we have never seen anything like before…” – Zerohedge

, RIA PRO: Market Vaccine For Virus Is More Fed’s “NotQE”

But, as I stated, it wasn’t just the PBOC, but also the Federal Reserve dumping tremendous amounts of liquidity into the markets which only had one place to go….equities.

, RIA PRO: Market Vaccine For Virus Is More Fed’s “NotQE”

While the Fed continues to deny current liquidity interventions are indeed “QE,” they have been clearly concerned about the potential of global instability impacting the U.S. In their most recent report to Congress, the “coronavirus” made its appearance as the latest threat to the global economic instability. 

Do NOT dismiss that last sentence lightly. 

Since last October, the Fed has been injecting the financial system with massive quantities of liquidity to fix “short-term funding needs.” Each time they have tried to slow the rates of funding, the market has declined, so they extended the facility. Initially, the facility was for October tax payments. Then it was extended for the “year-end” turn. Then it was extended for April “tax payments.” The “coronavirus” will be the next reason to extend the program into June.

Just in case you missed our previous report on this issue, the importance is that this type of funding has not occurred to such a magnitude outside of a financial crisis.

, RIA PRO: Market Vaccine For Virus Is More Fed’s “NotQE”

The question you should be asking is: “exactly what is going on?”

Dollar Rally

Currently, the flood of liquidity has been pulling foreign capital back into U.S. Dollars. While the U.S. dollar had previously started to breakdown heading into year-end, which gave a boost to commodities and oil. Unfortunately, that breakdown has been reversed.

We did this analysis for our RIAPRO Subscribers (Risk-Free Trial For 30-Days) this past week, which warned them of the potential for a continued dollar rally. The importance of this rally is that a stronger U.S. Dollar is not friendly to commodities, international, and emerging market exposure.

, RIA PRO: Market Vaccine For Virus Is More Fed’s “NotQE”

, RIA PRO: Market Vaccine For Virus Is More Fed’s “NotQE”

While there has been a good bit of excitement over the last couple of weeks of improving economic data points, it will likely be short-lived. Given these data points are both “sentiment surveys” and “lagging” in nature, what they captured was the uptick in commodities seen at the end of 2019 as the dollar weakened on “trade deal” hopes.

, RIA PRO: Market Vaccine For Virus Is More Fed’s “NotQE”

What has yet to be captured is the subsequent reversion in the major, economically sensitive, components. While the markets have rallied on news of more liquidity, the impact from the “coronavirus” has only yet started to be felt economically. Even if the virus was cured today, the economic impact will continue to be felt over the rest of this year. 

Importantly, the impact on China will be substantially greater, which will undermine any potential positive to the U.S. from the “trade deal.” That impact will result not only in the form of weaker economic growth in China, but globally as well due to the interlinked supply chains. This is going to manifest itself in weaker earnings and corporate profits, which will continue to make elevated asset prices harder to justify. 

As shown in the long-term chart below, despite the short-term correction, which is barely noticeable, the market remains extremely extended, overbought, and pushing into the top of its long-term trading range. 

, RIA PRO: Market Vaccine For Virus Is More Fed’s “NotQE”

Furthermore, the put/call ratio, which warned of the previous correction is once again pushing extreme levels rarely seen from a historical perspective.

, RIA PRO: Market Vaccine For Virus Is More Fed’s “NotQE”

The rally this past week serves as a stern reminder that market participants are trained to respond to “Pavlov’s Bell.” 

For the time being, investors have gotten away with overpaying for value, ignoring risk, and chasing yield. Eventually, the party ends, and it always ends in the most brutal of fashions.

This is why it’s important to have a process and adhere to it.

, RIA PRO: Market Vaccine For Virus Is More Fed’s “NotQE”

Trust The Process

We have had quite a few emails from readers over the past week asking why we were “buying” into our RIAPRO portfolios this past week(You can register for a 30-day RISK-FREE trial if you want to view our current portfolios.)

The short answer is: 

“Because that is what our process required us to do.” 

To understand the process, we have to go back. 

A few weeks ago, Shawn Langlois at MarketWatch picked up our article discussing why we were selling positions in our portfolio. To wit:

“Specifically, Roberts raised cash by selling off shares of Apple, Microsoft, United Healthcare, Johnson & Johnson, and Micron, and scaling back overweight holdings in various ETF sector plays, such as the Technology Select Sector SPDR, and the Health Care Select Sector.

While at the time, it seemed like a wrong move, a couple of weeks later, the market sold off. The benefit was the extra cash, and reduced exposure, help limit the downside draw to about 1/3rd of the market decline. 

Then, last week, things changed:

“With bond yields plummeting this past week, our bond exposures have gotten extremely stretched. The sell-off in the market, combined with the ‘risk off’ rotation to bonds, sets the market up for a reflexive bounce. The duration and magnitude of that bounce will be critical as to our next steps in positioning.” 

Chart updated through Friday

, RIA PRO: Market Vaccine For Virus Is More Fed’s “NotQE”

As noted, the market had gotten oversold on a short-term basis, which brought the risk/reward measures back into better alignment. This is where our process required we add equity exposure back into portfolios. 

  • In the ETF Model, we added Financials (XLF) and increased our stake in HealthCare (XLV) with both of those sectors having gotten oversold and bouncing off their respective 50-dma’s.
  • In the EQUITY Model, we added JP Morgan (JPM) and Pfizer (PFE) while increasing our stakes in Abbvie (ABBV), United Healthcare (UNH), and Alerian MLP (AMLP). 

Importantly, this rebalancing of risk did not dramatically increase our equity exposure. This is because, as noted above, the longer-term technical outlook remains “cautious.”

Yes, we realize we are very late-cycle, we also know that with the Fed, and global Central Banks, still intervening, we must give deference to the “bullish bias.” At the moment, the bullish bias remains, and functioned as we predicted last week.

“The ‘bullish bias’ is not dead as of yet, and investors will be quick to try and ‘write off’ the impact of the ‘virus.’ After a decade of ‘macro-events’ not stopping the bullish charge, the belief the market is ‘bulletproof’ has become so deeply ingrained into investor mentality it won’t be dislodged until it is far too late to matter.”

We have no certainty about when, or what will trigger the next bear market. 

What we do know is that such an event will likely be far more brutal than most realize due to years of excess risk-taking, leverage, and demographics. 

However, this is what our process is designed to handle:

  • The portfolio is managed for risk by adjusting the level of equity exposure relative to market dynamics, return outlooks, and technical deviations from long-term means.
  • The allocation is managed for risk by balancing positions for relative performance to our benchmark.
  • The positions are managed for risk by:
    • Employing trailing stop-losses
    • Regularly rebalancing positions back to target weights (taking profits)
    • Cutting laggards which aren’t performing as expected
    • Monitoring relative performance and participation

Importantly, notice that everything the process covers is the management against the “risk” of loss. 

If we manage against the risk of capital loss, we can safely participate with markets as they rise. When something eventually does goes wrong, the process will systematically close out positions, protecting our investment capital, until that process is complete. Then the process reverses to rebuild exposure when risk/reward dynamics are greatly improved. 

As long as the process is followed, risk can be controlled. Where the majority of investors go wrong, is by not having a process.

“Hoping” markets will continue higher indefinitely, is not a process.

As we concluded last week:

“We won’t know for sure until after the fact. This is why we manage risk in the short-term. Managing risk allows us to navigate the ‘twists and turns’ of the market without careening off the cliff.”


, RIA PRO: Market Vaccine For Virus Is More Fed’s “NotQE”


The MacroView

, RIA PRO: Market Vaccine For Virus Is More Fed’s “NotQE”

If you need help or have questions, we are always glad to help. Just email me.

See You Next Week

By Lance Roberts, CIO


Financial Planning Corner

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, RIA PRO: Market Vaccine For Virus Is More Fed’s “NotQE”

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Market & Sector Analysis

Data Analysis Of The Market & Sectors For Traders


S&P 500 Tear Sheet

, RIA PRO: Market Vaccine For Virus Is More Fed’s “NotQE”


Performance Analysis

, RIA PRO: Market Vaccine For Virus Is More Fed’s “NotQE”


Technical Composite 

, RIA PRO: Market Vaccine For Virus Is More Fed’s “NotQE”


ETF Model Relative Performance Analysis

, RIA PRO: Market Vaccine For Virus Is More Fed’s “NotQE”


Sector & Market Analysis:

Be sure and catch our updates on Major Markets (Monday) and Major Sectors (Tuesday) with updated buy/stop/sell levels

Sector-by-Sector

, RIA PRO: Market Vaccine For Virus Is More Fed’s “NotQE”

Improving – Discretionary (XLY) and Utilities (XLU)

As noted previously, we reduced exposure to Utilities and Discretionary due to their extreme overbought condition. The brief correction was cut short, and the rally was so quick, it failed to reduce any of the previous overbought, extended, or deviated conditions. We will likely see a correction in the next couple of weeks to re-evaluate our positioning.

Current Positions: Underweight XLY, XLU

Outperforming – Technology (XLK), Healthcare (XLV),  Communications (XLC)

We previously recommended taking profits in Technology and Healthcare, which have not only been leading the market but have gotten extremely overbought. Last week, Healthcare pulled back enough to allow us to reweight the position in portfolios. The rally in markets last week, reversed those conditions so we will remain pat on adding new positions for now.

Current Positions:  Target weight XLK, XLV, Underweight XLC

Weakening – Financials (XLF)

We noted previously that Financials have been running hard on Fed rate cuts and more QE and that the sector was extremely overbought and due for a correction. That correction allowed us to add a position to our portfolios, which we will look to build into over the next couple of weeks. 

Current Position: 1/2 Weight (XLF)

Lagging – Industrials (XLI), Real Estate (XLRE), Staples (XLP), Materials (XLB), and Energy (XLE)

With the Fed and the PBOC liquifying markets last week, everything rallied sharply. However, the technical damage in the lagging sectors still exists, so we are monitoring closely. 

Industrials tested and failed at previous highs and remains on a sell-signal suggesting a retest of the 50-dma is likely. 

Materials tested and failed previous highs and IS testing the 50-dma. It must hold next week, but the sector remains on a sell-signal.

Energy is deeply oversold and due for a rally. We added to our position of AMLP last week. 

Staples remains in a strong uptrend and has not provided an entry point to add exposure safely. 

Real Estate is testing previous highs and is back to overbought. There isn’t a clear opportunity to add to our holdings just yet. Be patient.

Current Position: Reduced weight XLY, XLP, XLRE, Full weight AMLP, 1/2 weight XLB and XLI

Market By Market

, RIA PRO: Market Vaccine For Virus Is More Fed’s “NotQE”

Small-Cap (SLY) and Mid Cap (MDY) – Despite the rally in the broader markets, Small- and Mid-caps continue to underperform currently. Both markets rallied last week and then failed without setting new highs. Unfortunately, small caps broke below the 50-dma, while mid-caps are currently testing that important support. We are close to being stopped out on our positions currently.

Current Position: KGGIX, SLYV

Emerging, International (EEM) & Total International Markets (EFA)

Emerging and International Markets, look just like small and mid-caps above. Both had gotten extremely overbought and needed to correct. That correction broke supports and the subsequent rally failed to set new highs. Emerging markets have now broken the 50-dma again, and International is testing that critical support. If we don’t see improvement next week, we are likely to be stopped out of our holdings. 

Current Position: EFV, DEM

Dividends (VYM), Market (IVV), and Equal Weight (RSP) – These positions are our long-term “core” positions for the portfolio given that over the long-term markets do rise with economic growth and inflation. We are currently maintaining our core positions unhedged for now. If we see deterioration in the broader markets, we will begin to add short-positions to hedge our long-term core holdings.

Current Position: RSP, VYM, IVV

Gold (GLD) – Over the last few weeks, gold has been consolidating near recent highs. Gold remains overbought, but continues to hold important support. We are at full weight in the positions, however, if this consolidation continues, supports hold, and the overbought condition recedes, we will consider over-weighting our holdings.

Current Position: GDX (Gold Miners), IAU (Gold)

Bonds (TLT) – 

Bonds rallied back towards previous highs on Friday as money rotated into bonds for “safety” as the market weakened. After previously recommending adding to bonds, hold current positions for now and take profits next week to rebalance risks accordingly. Bonds are extremely overbought now.

Current Positions: DBLTX, SHY, IEF

Sector / Market Recommendations

The table below shows thoughts on specific actions related to the current market environment. 

(These are not recommendations or solicitations to take any action. This is for informational purposes only related to market extremes and contrarian positioning within portfolios. Use at your own risk and peril.)

, RIA PRO: Market Vaccine For Virus Is More Fed’s “NotQE”

Portfolio/Client Update:

Last week, the markets got oversold on a short-term basis to allow us to add some positions to portfolios. 

Please Read TRUST THE PROCESS in the main body of this week’s missive.

As noted, the market had gotten oversold on a short-term basis, which brought the risk/reward measures back into better alignment. This is where our process required we add equity exposure back into portfolios. 

  • In the ETF Model we added Financials (XLF) and increased our stake in HealthCare (XLV) with both of those sectors having gotten oversold and bouncing off their respective 50-dma’s.
  • In the EQUITY Model we added JP Morgan (JPM) and Pfizer (PFE) while increasing our stakes in Abbvie (ABBV), United Healthcare (UNH), and Alerian MLP (AMLP). 

Importantly, this rebalancing of risk did not dramatically increase our equity exposure. This is because, as noted above, the longer-term technical outlook remains “cautious.”

Yes, we realize we are very late-cycle, we also know that with the Fed, and global Central Banks, still intervening, we must give deference to the “bullish bias.” At the moment, that bias clearly remains, and functioned as we predicted last week.

If you have any questions, please don’t hesitate to email me.

There we no additional portfolio actions this past week.

  • New clients: Slowing adding exposure as needed.
  • Dynamic Model: Bought positions in JPM, PRE, AMLP, UNH, ABBV. Reduced market hedge by 1/2.
  • Equity Model: Bought positions in JPM & PFE, added to existing holdings of AMLP, UNH, ABBV.
  • ETF Model: Added 1/2 position XLF, add to existing position XLV.

Note for new clients:

It is important to understand that when we add to our equity allocations, ALL purchases are initially “trades” that can, and will, be closed out quickly if they fail to work as anticipated. This is why we “step” into positions initially. Once a “trade” begins to work as anticipated, it is then brought to the appropriate portfolio weight and becomes a long-term investment. We will unwind these actions either by reducing, selling, or hedging if the market environment changes for the worse.


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, RIA PRO: Market Vaccine For Virus Is More Fed’s “NotQE” , RIA PRO: Market Vaccine For Virus Is More Fed’s “NotQE”

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, RIA PRO: Market Vaccine For Virus Is More Fed’s “NotQE”

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, RIA PRO: Market Vaccine For Virus Is More Fed’s “NotQE”


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Lance Roberts is a Chief Portfolio Strategist/Economist for RIA Advisors. He is also the host of “The Lance Roberts Podcast” and Chief Editor of the “Real Investment Advice” website and author of “Real Investment Daily” blog and “Real Investment Report“. Follow Lance on Facebook, Twitter, Linked-In and YouTube
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