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Market Trends for March 2020

Market Trends for March 2020

There are Decades where Nothing Happens, and then there are Weeks where Decades Happen?

In my February update, I wrote about the three things that is usually present for a Crisis to happen (Excessive Valuations, a Trigger & Change in Investor Sentiment/Human Behaviour), but little did I know that this would be evident just 31 days later.

Last night the S&P 500 wrapped up a 12.5% drop for the month of March and 20% first-quarter tumble for the broad index...and that is not even the worst of the major stock indices. For those who want to try and ease the pain of this number, you can of course compare it to the 66.5% drop in Crude Oil prices in Q1. One of few positive numbers when it comes to Q1 is the 241% gain of the VIX index.

But allow me to go back to the point above concerning Change in Investor Sentiment/Human Behaviour.

Behavioral economists have noted that humans do not assess gains and losses in a symmetrical manner . That is, the emotional magnitude of the pleasure of a $10,000 gain is less acute than the pain of a $10,000 loss. But due to recency bias, during raging bull markets of a long enough duration, US stock investors tend to put out of their minds a period like late 2007 through March of 2009, during which they lost roughly 50%. The sting of those losses has been replaced by what appear to be the easy and durable gains occurring over the past decade. Sure, there were bumps along the road, but nothing even totaling a 20% loss.

However, when markets enter freefall – as has occurred for the five weeks following the market’s February 19th peak, in which the S&P 500 declined an astonishing 35% (!) – this is the sort of jolt from which people sober up. The cold realization may set in that it now takes a 50+% gain just to get back to even. Under these circumstances, it would seem impossible that there would not be some damage to investors’ collective psyche. Where there had formerly been nothing but complacency and confidence, now doubt and uncertainty reside. Collectively we may begin to wonder: will things get worse, perhaps much, much worse before they get better?

Market participants are currently in the midst of a grand-scale prisoner’s dilemma in which one’s financial security is tied to whether the other participants will “defect” by exiting the market, thereby driving down share prices further . Faced with these prospects, “defection” may appear increasingly attractive, causing a cascading effect.

But there is another element to consider. In certain circumstances, fear is not only a valid emotional response, but it can be the salutary impetus for self-preservation. Walk too close to a sheer ledge with no barrier and instinctively one veers away from it lest a slight stumble lead to personal calamity.

At present, the S&P 500 is down more than 20% from its zenith just weeks ago. Nevertheless, based on historically reliable valuations measures, it is roughly as excessively valued as it was at the peak of the bubble prior to the Global Financial Crisis (GFC), during which it would lose 55% of its value.

So, if investors know that economic activity in the second quarter will contract more than at any time in modern history, does it make sense to be courageous and stay in a market that has only been more overvalued in 1929 and 2000? Or does it make more sense to use this rebound to further reduce exposure to stocks and other risk assets?

Only time will tell.

Market moves this month:

2020-03-31 - Finviz MTD Performance

Trend Barometer statistic this month

2020-03_TB with Heading

The Trend Barometer finished the month at a strong level of 64, which follows and even stronger finish last month, illustrating well how many markets have reacted strongly to the fear of what the fallout will be of COVID-19 on the world economy.

The next chart below shows a snapshot of a 44-market portfolio with markets listed in “groups” of market sectors:

The number of markets recorded in a trending state at the end of the month eased a bit to 27...down from 29 in the previous month, and if we include those ending right at the neutral reading (indicated by the "grey" shade right at the 30% level) we get up to 28, which leaves the Trend Barometer in a strong overall state. Please note that for the individual markets a reading of 30 is considered neutral as opposed to the Trend Barometer itself, where this level is 45.

In the RED camp (down trends) this months, we mainly have Energy, Equities, Base Metals, Meats and a few other Commodity markets, with Sugar trending down the most. Carrying the GREEN flag (up trends) at the end of the month, we are not surprised to see Fixed Income markets as pretty much the only markets in an up-trend.

2020-03_Markets with Heading

In the chart below, I have grouped the markets into 10 sectors. Since last month, the number of sectors exhibiting an overall trending state, decreased from 7 to 4 out of 10 sectors. This is the highest number we have seen for years, and may indicate the beginning of a new more volatile period ahead.

2020-03_Sectors with Heading

I ardently believe that very few people, whether they be in government, business, or financial markets, are seeing this crisis holistically, and as a result most are massively underestimating the financial market damage that is likely to ensue.

In a vacuum, were we to have what looks to be the greatest global economic shock since well before I was born, it would be devastating. But it would also be something from which we could expect financial markets to quickly recover. But now consider that prior to COVID-19 appearing, financial markets would have had to fall by in excess of 60% just to get back to historical average valuations. And, of course, we must factor in record corporate leverage in an era in which revenues are going to fall off a cliff for most, and profits will turn to losses. Finally, we must consider how likely it is that financial actors will avoid fear and the very logical tendency to financially “turtle up” when facing what will likely be both the greatest economic shock and epidemiological threat in the last one-hundred years.

So as usual I pose the question. How will investors protect their portfolios in a world of no/slow growth and interest rates at or below Zero?

If you want to check the current state of trend following, join me each weekend on The Systematic Investor Series, where we give you a raw and honest account of what it's like to be a rules based investor and share with you which trends are happening right now.

2020-03_TB - 6 months Evolution


I hope you found the information useful as part of your own evaluation of the trend following part of your investment portfolio. I will continue to do my best to keep you up-to-date with regards to the environment for diversified trend following strategies and would love to discuss any of this information with you. Just reach out to me.

P.S. if you want to follow the Trend Barometer on a daily basis, please click here and if you want to see the list of Market Symbols explanations, please click here.