Sliding Into Home Base – Barely!

Even with the volatility and disruptions to the economy 2020 brought to date, an excess of uncertainty still remains. The economy sputtered along like an RV rolling into a gas station on an empty tank or a base runner barely sliding into home base just in the nick of time. We collectively enter the 4th Quarter just barely making it, despite the rise in the overall indices.

Risks to Tech and the NYFANG Index

As our last newsletter mentioned at the end of the 2nd Quarter, we still reinforce the belief the market is not out of the woods yet. Further downside risk lies ahead. The September market drop did not constitute a deep enough retraction to remove the excess froth of the markets, in our opinion. Case in point, the chart shows the NYSE FANG index over the past five-year time frame. The charts easily show the behavior of this index. Its components (Apple, Amazon, Google, Netflix and Facebook) clearly became parabolic and overbought. Naturally, this was a response to the pandemic causing structural societal changes and the need to embrace technology even more.

However, the quick pace of the V-shape recovery from the depths of the pandemic in March and April occurred too fast. This remains unsustainable through the end of the year. The lack of volume on many of the stronger days in the market over the past two months also leaves us with the conviction that this is not the time to put large amounts of money to work. Additionally, there is the existential risk to the tech sector of anti-trust litigation. Should the tech sector begin to take a larger plunge than it did in September, the potential for dragging down the other indices could exist and lead to a bigger market correction, not just a dip.

Remaining Uncertainty and Volatility

From a technical analysis, the dip in the markets through September and the minor rebound as of the date of this letter do not constitute a significant enough drop to add risk at this time. Levels of uncertainty surrounding the supreme court nomination, upcoming earnings reports, stimulus package and election results lead us to an opinion. A further drop in the markets could be upon us shortly ahead. Scherschel Wealth advocates waiting for a further pullback in the market. Perhaps back to half of the market rise since the March 23rd market bottom would be acceptable. Then an investor might want to put new or previously harvested money to work again.

Year End Targets

Looking forward to the end of the year, we anticipate that the markets will remain range-bound for the rest of the year frustrating both the bulls and the bears. However, we also anticipate that most of the uncertainty should resolve itself throughout the 4th Quarter to set up greater opportunities heading into 2021. Our major indices targets based on our technical analysis for the end of the year are as follows:

Dow Jones Industrial Average: 27,000

S&P 500: 3,150

Nasdaq Composite: 9,900

If you seek financial advice or are uncertain about your investment portfolio, Scherschel Wealth would be pleased to offer you a complimentary analysis. Please contact Louis Scherschel to discuss further.