Date: October 9, 2020

Bulls Running Hot

As you know my thesis has been for one more decline into mid to late October below the recent lows and then a rally into 2021. That was my number one scenario. My second scenario had the mid-September low being the bottom and the market remaining uber strong. Until this week, I felt confident in my view.

Now, I have to be open that my less likely scenario may come to fruition. Why?

The rally this week has been powerful and broad. No doubt about it. Three of of four days this week has seen more than 80% of volume trade in stocks that were up on the day. On Wednesday and Thursday we saw back to back days of 80% up volume. This behavior is considered to be “thrust-like” which is usually seen as stocks are taking off from a low, not so close to their highs.

Take a look at the chart below with the 80% threshold in blue.

Additionally, the weakest major stock market index, the Russell 2000, has powerfully surged more than 10% over the past two weeks. That is unusually strong momentum and typically leads to more strength.

Don’t get me wrong. I am not abandoning my concern and going all in on the long side. We have increased our exposure carefully and will take things day by day. However, I would be arrogant or ignorant if I didn’t assess the data as it comes in.


Paul Schatz, President, Heritage Capital