…this is how the Basket Ball fans cheer their team when the game is at a critical stage and being defensive is a favorable strategy. Well, we are going through something similar on Wall Street and being defensive is not a bad idea.
Markets ended up in the correction territory as all the three indexes (Dow, S&P and Nasdaq) dived more than 4% this week. Volatility peaked as we were up one day and down the next. The euphoria of Trade truce weared off rather quickly as news broke out that Meng, the CFO of Huawei committed violations of US sanctions against Iran. Huawei to China is same as Apple to US so one can understand the anxiety of Wall Street. The irony of the situation was that this all happened while the handshake was going on at G20 and both claimed later that they were not aware of the same! This definitely puts the trade truce at risk. To make matters worse, there is a constant conflict in the White House regarding trade negotiations with China. The Trade representative Peter Navarro and economic Advisor Larry Kudlow cannot see eye to eye. Kudlow came on Live and said that good progress was being made with China and Markets were up initially but later tanked as Navarro opened his mouth and said the exact opposite! All this is definitely not helping and algorithms are making it worse as they feed on every word from the headlines. Lastly, the Payroll numbers also disappointed and fueled speculation of a slowing economy going forward.
Currently economy is on a strong footing, Fed has taken a backseat, China seems to be cooperating on Trade truce but the speculation that we might be in the last leg of this economic cycle is causing havoc in the Markets. In addition the sagging 10 year Treasury yield is spooking Money Managers of a yield curve inversion. This happens when the short term yields are greater than the long term yields and historically such situations have been precursor to a recession.
Bottomline it is time to play safe and hide out in sectors like utilities, staples or even cash till the dust settles. Markets are oversold and we will get short term bounces but Money Managers are using this to “Sell the rips” instead of “Buy the dips”. The odds of a full blown Santa rally are diminishing by the day with just 3 weeks left. Maybe it is time to train the brain with the mantra – DEE-FENSE DEE-FENSE DEE-FENSE. Have a nice weekend.
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