Date: June 24, 2020

The Week Continues to Unfold as Expected

On Monday I wrote about the headwinds facing the stock market this week in We have post-options expiration and end of quarter during an uptrend.

Yesterday, I wrote this in an email.

“On top of that we have the polar opposite quarterly rebalancing that we had in March when stocks had sold off so much that more than $100 billion had to be purchased in stocks at quarter’s end by institutions following a set asset allocation, like 60/40. With stocks rallying so much in Q2, institutions will need to sell stocks and buy bonds at quarter’s end to the tune of somewhere between $100 billion and $200 billion. 

At the same time, the annual rebalancing of the Russell indices takes place this Friday where stocks are added and removed at the close. S&P does this periodically where Russell does this only once per year and it’s a much bigger deal. That usually leads to some volatility and sometimes “curious” behavior. 

In short, I think the major stock indices minus the NASDAQ 100 have entered a new trading range, bound by their highest and lowest levels in June. Sell the rips and buy the dips.”

I think that’s all still valid today as pre-market indicates a lower opening for stocks. However, as we have seen throughout the rally, where the market opens and closes have little resemblance. 

I received a few emails that I am turning bearish. I would not say that is accurate, but I am certainly not as positive as I was. I think stocks are in a range and it’s hard to be excited until they are at either end. I will say this; if the Dow Industrials were to fall to 25,000, that would get me a little more excited because it would be put up or shut up time. Risk would be clearly defined and the point where I knew I was wrong would be close by. 

Speaking of being wrong, which I am an expert in over 30+ years, that is about as important as anything in investing. You have to know when your thesis on something becomes bogus. On most things I do, I look at it and try and figure out where I will be wrong or how I will be wrong. Sometimes, you get caught up in a macro event like the Corona Crash and there isn’t much you can do. However, usually there is time to take action. 

Let me segue back and finish with this. Short-term sentiment had become frothy, almost to the point of being greedy. I wrote about it here. Markets usually punish those late comers. However, longer-term sentiment as measured by cash levels in institutional portfolios as well as the spike in money market levels remains very fearful. It’s a classic dichotomy to steal the name from my first fantasy sports team in high school. The short-term continues to be a bit murky, but the longer-term looks very favorable. 


Paul Schatz, President, Heritage Capital