Wednesday, April 15, 2020

Why Relative Performance Is A Key To This Market

Most of us look at a particular index, stock, or asset and try to figure out from charts whether it is weak or strong.  In the current market, it is also helpful to look at relative performance:  what is relatively strong to an overall market or asset class and what is relatively weak.  Many good trades can come from picking out the winners and losers in the recent COVID outbreak.  That is precisely what money managers I work with are doing:  going long what benefits from the current environment and short what gets hurt.  Here are some illustrations:

Technology stocks (XLK) have bounced quite nicely from the market lows, reflecting favorable outlooks for an online world during a period of social distancing.  For example, we recently saw new 52-week highs for Amazon.

Regional banks (KRE) on the other hand are not that far off their lows, reflecting concerns about commercial and real estate loans that may not be repaid--and the dwindling market for new loans.

Gold (GLD) has been soaring from recent lows, fulfilling its traditional role as a hedge to fiat currencies during a period of wildly expanding central bank balance sheets.

Oil (USO) has suffered a double whammy of a price war and greatly reduced demand, given the shutdown of much travel.

It is in the shifting of these themes that we will see evolving opportunity in markets.  If the experts I'm following are correct, periods of social distancing will be with us for a while.  That is going to create new opportunity sets and shut down others.  As I recently noted, that is likely to lead to a promising trading environment.