Switching Gears - Succinct Tactical Thoughts from our Technical Analyst

Sep 25, 2020 | Nick Scholte


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Scholte Wealth Management uses technical analysis as a supporting consideration when making equity allocation decisions. While not the primary determinant, its utility is especially important when key portfolio adjustments loom. Now is such a time.

To my clients:

It was a down week for North American stock markets with the Canadian TSX falling0.8% ; the U.S. Dow Jones Index falling 1.7%; and the U.S. S&P 500 falling 0.6%.

It will be a shorter update this week with a bit of a switch-up to boot, as I include thoughts from one of RBC’s technical analysts.

Before passing along the thoughts of our technical analyst, I’ll simply observe that nothing has changed with regards to my fundamental outlook for the economy and the markets. I feel markets got way ahead of the “facts on the ground” by pricing in a recovery that seemed excessively optimistic. The turn lower in markets these past four weeks – by nearly 10% - seems to be recognition of this excessive optimism. Are the economy and certain companies doing better than I anticipated back in February, March and April? Yes, absolutely. But lots of risk remains as Covid-19 cases are turning higher in many developed economies, and worse may be in store as weather continues to get colder (and wetter as is the case here in Vancouver) in the weeks ahead. As such, the equity (i.e. stock) weighting in client portfolios remains slightly below neutral as I continue to eye a nudge higher to a full neutral position on further stock market weakness.

So, turning to technical analysis, let me first reiterate the perspective that I have shared in these weekly updates over the years. Specifically, that I personally put much more weight in “fundamental” analysis (the study of actual economic and company specific data) than I do in technical analysis (the study of pricing trends in stocks irrespective of the data). While I admit that I vacillate a bit as to how much weight I give to technical analysis, I’d suggest that it contributes somewhere between 1/10th and 1/3rd to my decision making process. Put another way, it is a supporting consideration, although far from being the primary determinant.

All this said, here are the thoughts expressed this week by Bob Dickey, one of our internal technical analysts here are RBC Dominion Securities. He wrote (the lead image at the top of this week's blog post can be used as reference):

True to the charts, the Dow Industrials and the S&P 500 bounced from their respective support levels of around 27,000 and 3200 on Monday, but that does not mean that the correction period has been completed. The various indicators have not reached the kind of deeply oversold levels that we need to see in order to have confidence of a bottom being formed. So, after a bit of bouncing for few days we expect to see the pullback continue with a high risk of breaking the Monday lows (emphasis Nick’s). The larger Tech names appear to still be early in the process of pulling back, and along with that their outsized influence on the indexes could lead to a break of the near-term support levels, with the next areas of support on the Dow and S&P about 8% lower than the Monday lows. “Buy the dip” may not be a strategy that works over the next several weeks, in our view.

As far as technical analysis goes, this verbiage is about as clear as one tends to see from these pundits. And to the degree I include this perspective in my decision making process (see above), it is supportive of my decision to await further weakness before adding additional equity back to client portfolios.

That’s it for this week. All the best and stay safe,

Nick

Nick Scholte, CIM, FCSI

Vice-President & Portfolio Manager

Scholte Wealth Management
RBC Dominion Securities Inc. │ Tel: 604.257.7569 │ Fax: 604.235.9950
3200-1055 West Georgia │ Vancouver, BC │ V6E 3P3
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