The Autumn of Discontent

Winston Churchill once said to a woman berating him for changing his position “When the facts change, I change my mind. What do you do madam?” It is indeed true that we live in a world that is constantly evolving, yet from a financial perspective, it is imperative that we do not allow our biases to determine our investment posture. The game plan that is in play is never static even though it may appear so. Longer term strategies are less apt to major changes as the underlying evidence supporting these strategies are less prone to change. Shorter term however, the situation becomes more fluid. Nevertheless, regardless of which blueprint one follows, “change” is possible and in many instances the ability to reverse course is what will differentiate success from failure.

Is our title (The Autumn of Discontent) indicative of some type of change in our positioning towards equities? Has the “news” background which has been predominantly negative taken its toll on our models? Are the market fundamentals just “too much” to handle even for the most ardent bulls? Let us look at some of these issues as the “Dog days of summer” take hold.

Just this week:

Clearly, if one was basing investment decisions on the daily headlines, bidding “Sayonara” to equities would be the only conclusion. If we add the prevailing narrative back home, the bulls are all but extinct. EVERYONE is confidently negative, defensive, and risk averse. EVERYONE is aware of the fundamental issues our corporations, the economy and the markets are facing. They are now incredibly obvious, unlike at the beginning of the year when the market actually topped. Rear view mirror surveying has never proven to be a profitable strategy in the past, so why should it be any different this time. The market is a forward-looking mechanism, except that it tends to discount “things” that we are not able to decipher in the present or are impossible to predict. As the vast majority of pundits wait for “the other shoe to drop”, perhaps the market has other things in mind!

Possible low or not there yet!

Sometimes it is simply not possible to render an assertive statement regarding the immediate direction because of the various number of outcomes involved. There are, however, several possibilities evolving and rather than try and “guess” which one is more probable, it would be best if we tackle each one on its own merits.

INTERMEDIATE/LONG TERM (6+ months)

From an anecdotal point of view, we continue to expect an upside resolution. The correction has lasted longer and gone lower than we expected earlier this year, but at this time we have no changes to our outlook. Ideally, if we were to break above the early JUNE highs (4177.51) this could signal that the lows may have been registered.

Source: www.stockcharts.com

SHORT TERM

There is one scenario that has presented itself, albeit somewhat early to make a final assertion, yet it is worth noting. Although the final outcome also has a BULLISH resolution, the shorter-term picture is prone to more “backing and filling” for another 3-4 months, with possible new lows one more time later this fall. Although this scenario has a more “negative” bias for early autumn, it would portend for a much clearer, bullish picture for the latter part of the year and for all of 2023.

Here are the necessary (or possible) steps that we will be looking for:

1)    The month of July DOES NOT break the June lows.

2)    The month of July DOES NOT break the June highs (4177.51). In other words, JULY ends up having a range within the high and low of June. JULY does end up closing HIGHER than June (Higher than 3785.38)

3)    AUGUST is also a month that remains stuck between the high and low of JUNE but has a negative bias and closes DOWN versus the month of JULY.

4)    If on AUGUST 31st the above criteria has been met, it would set the stage for a “possible” break of the JUNE lows during the month of SEPTEMBER marginally (think of the chaos and panic this would create) and then if history serves us correctly, the ensuing move higher will be the REAL THING!

Clearly such a scenario requires more patience. It is a scenario that will create more panic, anger, and anguish. This is not to say that it WILL happen, but should it present itself and assuming the current indicators remain as is, it has a very high probability of success with sufficient precedent. Major turning points during the September-October timeframe are plenty, even during prolonged Bear markets.

Managed Accounts

It was a good week across the board for all portfolios. The growth positions were the biggest beneficiaries this past week as many of these companies had been punished without mercy over the past 6 months. It appears that both Commodity and Value related equities are taking a breather for the time being. We remain confident that in both cases, they will resume their respective bull markets. The “rest” is necessary to refuel.

During those times when the market is attempting to find a base to build on, we tend to witness a lot of back and forth with individual issues. This is because the most recent buyers tend to be prone to recency bias and therefore will “unload” quickly on the first sign of a rally or trouble. As long as the general equity market remains in a sideways formation, my goal will be to identify those issues that are refusing to go down (building relative strength) and to wean out the laggards. We remain confident that our portfolios will continue to perform well during this turbulent time and shine once the advance does take hold. Quality is key to any investment.

Flashback

Japan would be the last place on earth where one would imagine an assassination taking place. My heart goes out to all Japanese citizens after this tragic and unnecessary event. Assassinations used to be much more common in the West but have died down for many years. We grew up in an environment where my parents always talked about the “Kennedy Assassination” and how that event defined so many people later on. We are living in very dangerous times where polarization along political lines has become a real threat to peace, even in so-called “docile nations”, like Canada, where the “unthinkable” is now possible. We will refrain from blaming the “left” or “right”, suffice to say, that both “extreme sides” have become more vocal, and history shows that in those instances, those in the middle tend to navigate towards the two ends – a dangerous sign, indeed.

The US midterms are rapidly approaching and unless the Democrats make some drastic changes in both policy and rhetoric, they will be facing annihilation come November. The American public is “unforgiving” when it comes to their pocketbook. A declining stock market, higher prices at the tank and at the grocery store, are not ideal conditions to be going to the ballot box. Based on what we are seeing, there is still time for the stock market to recover enough to cushion the Democrats’ fortunes but time is running out. New lows in September will probably not give them much time even with a market recovery heading into November.

That is it for this week.

We thank you for your confidence and your loyalty. We look forward to speaking and seeing you soon. In the interim, please do not hesitate to contact us with any questions or concerns.

Warmest regards,

Al Fiumidinisi

Senior Portfolio Manager

514 392-7607

Kosta Dariotis

Senior Portfolio Manager

514 392-7606

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