SPI down 7 but Dow Futures down another 300. A few strategy points to make this morning.

TECHNICALLY

• One bad day...or a new trend - Friday’s 5% drop at first sight risks being the start of a bigger correction (corrections start fast) although all Friday did was negate the previous two days and whilst one bad day doesn’t make a correction, two days going nowhere certainly doesn’t – it’ll take a harder and more persistent fall than that to change asset allocation (fully invested at the moment – which obviously leaves us on watch after Friday).
• Technical decision point - This chart was in the Weekend email - You can see that the last two days are consolidated into one candle which is technically innocuous although that last ‘Doji’ candle in an uptrend is a sign of indecision, of ‘thinking about it’ and can often suggest a reversal of trend - from up to down in this case. Any chartist will tell you, the next couple of days are technically important to either re-establish the uptrend, or not.  

STRATEGY SUMMARY

Trade War irrelevant – The US ‘crafting retaliatory measures’ against China for their misinformation over COVID-19 is the immediate worry. The timing is appalling, to be threatening the global economy and the Chinese economy in the middle of the biggest economic dip in history seems thoughtless and unsympathetic to the global economic backdrop – when US and European GDP is expected to be down 40% in Q2 compared to 4-5% in Q1. But we can’t expect sensitivity from a Trump led US Government. So it is what it is. But let's not get too negative. As highlighted in the WEEKEND newsletter, against the threat of a trade war in 2019 we still saw a bull market, and with many stocks (apart from US big tech) currently on their lows not their highs, the risk is minimised. Trade war fears in 2019 threatened to knock all the financial markets off their over-priced highs, it could have been the catalyst for bursting a bubble, but to burst a bubble you need a bubble. We are not (apart from US big tech) in a bubble at the moment. There is no bubble for a trade war to burst. On its own a trade war is pretty irrelevant compared to what is ahead of us on the economic front from COVID-19. If we get a full blown trade war the Q2 GDP number could be down 41% instead of 40%. Who cares if the GDP number is minus 40% or minus 41%. So let's not fear a trade war too much. Its certainly upsetting sentiment, but it's not really the point at the moment. (Really hope this is not denial - being aware that it could be is enough).

Meanwhile:

• Oil down today but it's OK – Oil not behaving today after Chevron and ExxonMobil fell 2.8% and 7% on results in the US after shutting down great swathes of their shale oil businesses, cutting capex 30%, with ExxonMobil announcing a big inventory write-down (Chevron made a profit but may have missed the ExxonMobil trick of taking provisions now to pay less tax and to add back later). Despite today’s underperformance the oil sector is clearly near its short term lows in a long term game. Was quite encouraged by the WPL commentary about looking to buy distressed assets – they see this as an opportunity and obviously don’t have balance sheet issues. They are the quality/safer play.
• Sell in May and go away – I published the standard article on that on Friday but let's be clear, it's irrelevant. Nice idiom but it is dumb to act on it alone.
• Banks – Westpac clones ANZ with no dividend, earnings down around 40% pre-provisions and around 60% post provisions. The price was up at one point today. So no new disturbance from them. Sector still looks like it could bottom. Neutral weights in our portfolios, hedging all outcomes. Macquarie results on Friday a risk – we have overweight holdings.
• RBA – Meeting tomorrow – Irrelevant. Unless the RBA have developed a vaccine they are followers of market developments not leaders.  
• Happy with REITS – Happy with our recent bottom picking on the charts. The sector is clearly on long term lows and presents an opportunity. It is oversold on hopefully misplaced credit crisis worries. Whilst we would not naturally hold them in a growth portfolio we would hold them temporarily for a recovery trade and are doing that in our Income SMA.
• Non-Recovery stocks underperform in a recovery – Worth noticing that our underperformers last week (before the market fell over on Friday) were the quality long term COVID-19 survivors – of our stocks – TLS, WOW, RIO, CSL, RHC, TWE, COH. Message is – when the market rallies on COVID-19 recovery – it is the recovery stocks, not the safer quality stocks that outperformed – safe stocks will underperform in a recovery.
• Biggest worry – The biggest worry is not a trade war it’s a ‘Second Wave’. A COVID-19 relapse anywhere in the world after lockdowns come to an end could be a market disaster. If that happens we are going to have to rethink everything. For now we are happy playing the recovery trading game. We are assuming that whilst the trade war issue might dent sentiment now the market is likely to dull to it (it could just fade away anyway) and it is likely to remain secondary to the main issue…which is “Are we over COVID-19?”. We are assuming we are for the moment, an assumption that is subject to change at any morning meeting.

As I wrote on Saturday, we are currently fully invested and on that basis you might imagine we are biased to optimism but the bias doesn’t hold much loyalty in the current markets. You have to be open-minded not resort to a hard opinion. In these extraordinary moments (before a long term bull market returns/resumes) you have to be skirmish not stand and fight. It's hit and run. You don’t line up in position on the battlefield, if you do you become a target – fodder, for more mobile investors to pick you off. You have to be able to move. So we remain 'flexible of mind'. Herd watching not joining.

We are definitely on alert for a new downtrend, but:

• Not reacting yet.
• The recent uptrend is still intact for the moment.
• Open-minded about what to do next, not standing on a view.
• Prepared for anything to happen.

Let’s see what this week brings.