Leave It On… Or Not

US stock indexes reversed last week’s downdraft (up between +7.9 to 14.9%) after getting massive injections of liquidity from the Fed and more stimulus from Capitol Hill. Small caps and value started to visibly outperform signaling the bottoming process is underway.

Of course, question is whether these unprecedented measures will be enough to overwhelm the impact of the virus. The wild card is how long will the quarantine lasts, and just when a return to normalcy will occur. According to Dr. Fauci, the US health adviser, normalcy will never happen or ever look the same.

Stress in investment grade corporate debt, muni bonds and high yield/junk debt was all alleviated by massive buying by the Federal Reserve, forcing shorts to cover. The spillover to other asset classes or sectors was palpable.

This week’s highlights are:

• Risk Gauges are bullish
• Value stocks and Small Caps outperformed the S&P 500
• Credit Markets rebounded as the Fed is buying everything in and out of sight (including stocks and municipal bonds)
• Many lagging sectors outperformed including most of the Modern Family including Grandma Retail and Regional Banks
• Market Internals are very overbought short term
• Volatility (VXX) sold off but still holding important levels which means that Mr. Market is not convinced that the bottom is in
• Semiconductors and Consumer Staples lagged, confirming the bottoming process is most likely underway
• Gold acted well without direct buying from the Fed

On a final note, one thing to watch longer term is the dollar, because the Feds actions over the past 35 years could cause a dethroning of the dollar (too much debt …like Venezuela) as the world's reserve currency, and our ability to prop up our markets will be over. The odds of this occurring increase every time we bail out the markets and our debt levels climb to unprecedented levels.

If you are a buy and hold type of investor the time to fire your adviser is NOW and rethink this strategy before it’s too late. Tracking what is leading on a relative basis is key to a profitable strategy, especially during these market conditions where there are only a handful of outliers. For more info about our proprietary Triple Play Indicator click this link.

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