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Fear Gauge Breaks its Glass & CoronaVirus Recoveries

CAMS Weekly View from the Corner – Week ending 2/28/2020

March 2, 2020

For the bulk of this year we have offered observations within these Weekly Views that have leaned toward caution.  With each passing week this caution has increased in light of the messages gleaned from the behavior of overall market participants.

Last week we offered the messages of unrelated investment areas (called inter-market analysis) was beginning to get notable with their cautionary theme.  Namely, the inability for sectors within the stock market to chime in with the upward performance of Technology while simultaneously “safe harbor” long term Treasury Bonds were handily outperforming the stock market overall.

Reduced to simplicity market participants were ever less interested in the stock market and far more interested in owning safe harbor type investments.  When this occurs it usually is not by accident and with this, yet again, Mr. Market shared its opinion as to its near-term direction via its overall behavior.

This led to a stock market cliff-dive while the safe harbor investments catapulted higher.  Now, near-term, both seem to be stretched in opposite directions to an extreme.  Extremes usually do not last long in markets so this gets quite curious at this stage.

In terms of the above, the point is this cliff-dive did not come from nowhere but rather was telegraphed more with each passing week.  Now that the dive occurred and opposite extremes have developed the logical observatory question is what is the market suggesting at this stage.


Click For Larger View:  http://schrts.co/pSqbFIRc

A month ago we shared the above chart of the Volatility Index which is known in slang as the “Fear Gauge”.  The red box on the left was shared as to what can happen when fear builds and the red oval to the right of the chart was our current day.  The bottom line message was something was building here that warranted attention.

To the far right of the chart we can see this past week the Fear Gauge broke its glass container and went on a rocket launch.  Historically these levels of fear offer a near-term peak.  This is not to say day one but rather as a near-term offering.

For my part I have been using this index for over a couple of decades and cannot recall a spike this high this fast – wow!  As we have offered – highly valued markets can truly turn volatile in a hurry and this is yet another example.

Coronavirus

Reducing markets to extreme simplicity they simply play out the human story with a forward view as they focus on where “x” issue will lead.  We humans are dealing with yet another health challenge that presents an incredible unknown.  This can be frightening at many levels within our individual and collective stories.

Three weeks ago we shared Johns Hopkins detailed monitoring site of the worldwide Coronavirus.  The link is here if you are interested in following this first-hand:  https://tinyurl.com/uwns6z5

For my part I have followed this consistently.  As a general observer what has caught my attention with each passing day is the notable increase in recoveries!  The Johns Hopkins site is loaded with data on this Virus and its process with recoveries being a data set.

Dating back to when we shared this site in our February 10th Weekly View, I see to current day that new cases have doubled while the total recoveries have grown 14-fold.  This trend is notable.  To compare and contrast, can you imagine if the trends were opposite.

With markets hitting extreme fear levels coupled with the fact that recoveries are taking place at a growing level markets may find some footing in here.  If they do the key observation point will be if they can hold said newfound footing.

Regardless, with such tremendous unknowns investing to your risk levels is certainly advised.

(Below is a chart extracted from Johns Hopkins of new cases relative to recoveries.  The middle line represents recoveries while the top line represents new cases in China and the bottom line new cases in other locations.)

Coronavirus - 3.2.20

I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis

Portfolio Manager, CAMS Spectrum Portfolio

Footnote:

H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP).  This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”.  A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.

This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY.

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