Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio & Technical Strategy.
Following a 13% 15-day up-move from 5/18 to 6/8, the S&P 500 has since been in a consolidation phase, currently trading just above its 200 DMA support level of 3020. Catalyst for the S&P 500’s -5.4% pullback has been a rise in the virus spread as the economy reopens. While an increase in cases was inevitable in our view, the increasing number of hospitalizations and percentage of tests coming back positive are concerning. Monitoring hospitalizations will be key, as worries over hospital capacity will put added pressure on government officials’ decisions in restarting local economies. We are encouraged by improvements in treatments, mortality rates, length of hospital stays, and the potential for a vaccine. However, we expect volatility in the spread in the weeks and months ahead. We continue to believe that the bar is high for broad economic shutdowns again, but there are increasing odds of delayed reopenings or reversing reopening steps. This will impact volatility in equity markets, but could also result in further monetary and fiscal stimulus.
For now, we view this as a normal consolidation phase following the market’s historic rally off the March 23rd lows. If the narrative does not shift (from stimulus and the economic restart), we think downside support in the 2956-3000 area likely holds (1-3% downside from current levels). However, if a more challenging narrative develops (i.e. the virus spread continues to accelerate and concerns on hospital capacity rise), the S&P 500 could push lower with support in the 2850-2736 area (6-10% potential pullback from current levels). Upside technical resistance lies in the 3163-3233 area in both scenarios. In the longer term path ahead, we believe the positives (namely unprecedented stimulus) outweigh the potential negatives. It makes logical sense for the market to slow down or pause in the short term following such enormous strength off the March 23rd lows. Importantly though, historical performance following similar surges out of recessionary bear markets has been very favorable over the next 12 months. This contributes to our positive bias and view that pullbacks should be used as buying opportunities.
Beneath the surface, relative strength from the more technology-oriented stocks are masking the pressure felt by many other stocks in the market’s volatility. While the S&P 500 index is just -5.4% from its highs on 6/8, the average S&P 500 stock is down 12% since then. The more economically-sensitive areas- i.e. small caps, average consumer discretionary stock, industrials, and financials- have all now pulled back to their 50 DMA support. These are also the areas that will be more volatile if the virus spread deepens though. If they are able to hold technical support, we would look to buy partial positions in these more cyclical areas with a long term view.
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