June 22nd, 2020
Chadd Mason, CEO The Cabana Group
Which Way Will the Market Break?
U.S. equity markets continue to be range bound but hold above the all-important 200-day moving average at 3000 (S&P 500). I read over the weekend that there remains a record amount of money in cash via money market accounts. The belief among the “experts” is that this is evidence that the rally off the March 23 lows was mainly the result of short covering as those traders who made money betting on stocks to go down began taking profits and covering their positions. This activity by professional traders causes the share price of equities to go up as the traders buy the shares that they had previously sold short. If there is a great deal of “short interest” and stocks begin to rise (or even appear to have bottomed), the act of taking profits by buying the shorted shares can cause the market to move up rapidly. The more short interest that exists, the more explosive the rally can become. We certainly saw a lot of people betting that the market would continue down in the middle of March and we have certainly seen an explosive rally since. The idea among the pundits who have examined this is that the rally has run out of steam and we are headed for another leg down since no new money is coming in to move prices higher. This may very well be true, but I can think of another possibility.
What if some good news suddenly shows up and the market does begin to move higher, even if on low volume? Well… I will tell you what might happen. All those people who are parked in money market accounts, and have missed out on a huge move up in stocks are going to feel pressured to move that money back into stocks, lest they miss out on even more upside. This is the primary problem with jumping out of the market and going to “cash”. It is awfully hard to know when to get back in. This record amount of cash sitting around out there represents a lot of people, professional and otherwise, who are in this predicament. If the experts are wrong and the market does break out higher, look out for a potential move much higher as the pain of sitting out becomes too great and people are forced to buy stocks.
So, which way will the market break? I don’t know and don’t care. We will be prepared either way. As long as the broad indices hold above their 200-day moving average, the chances are better than even in my opinion that it breaks up. If that happens, we are going to see a lot of people chasing a fast-moving train. At Cabana, we remain Moderately Bearish but are preparing to reallocate to add additional risk assets if prices begin moving higher.
This material may contain ‘forward looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. All investment strategies have the potential for profit or loss. All strategies have different degrees of risk. There is no guarantee that any specific investment or strategy will be suitable or profitable for a particular client. The information provided here is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation. Investment involves risk including possible loss of principal.
Cabana LLC, dba Cabana Asset Management (“Cabana”), is an SEC registered investment adviser with offices in Fayetteville, AR and Plano, TX. The firm only transacts business in states where it is properly registered or is exempted from registration requirements. Registration as an investment adviser is not an endorsement of the firm by securities regulators and does not mean the adviser has achieved a specific level of skill or ability. Additional information regarding Cabana, including its fees, can be found in Cabana’s Form ADV, Part 2. A copy of which is available upon request or online at www.adviserinfo.sec.gov/.
The Financial Advisor Magazine 2018 Top 50 Fastest-Growing Firms ranking is not indicative of Cabana’s future performance and may not be representative of actual client experiences. Cabana did not pay a fee to participate in the ranking and survey and is not affiliated with Financial Advisor magazine. RIAs were ranked based on percentage growth in year-end 2017 AUM over year-end 2016 AUM with a minimum AUM of $250 million, assets per client, and growth in percentage assets per client. Visit www.fa-mag.com for more information regarding the ranking.
The Financial Advisor Magazine 2019 Top 50 Fastest-Growing Firms ranking is not indicative of Cabana’s future performance and may not be representative of actual client experiences. Cabana did not pay a fee to participate in the ranking and survey and is not affiliated with Financial Advisor Magazine. Working with a highly-rated advisor also does not ensure that a client or prospective client will experience a higher level of performance. These ratings should not be viewed as an endorsement of the advisor by any client and do not represent any specific client’s evaluation. RIAs were based on number of clients in 2018, percentage growth in total percentage assets under management from year end 2017 to 2018, and growth in percentage growth in assets per client during the same time period. Visit www.fa-mag.com for more information regarding the ranking.
No client should assume that the future performance of any specific investment or strategy will be profitable or equal to past performance. All investment strategies have the potential for profit or loss. All strategies have different degrees of risk. There is no guarantee that any specific investment or strategy will be suitable or profitable for any investor. Asset allocation and diversification will not necessarily improve an investor’s returns and cannot eliminate the risk of investment losses. While loss tolerance and targeted “drawdown” are identified on the front end for each portfolio, Cabana’s algorithm does not take any one client’s situation into account. It is the responsibility of the advisor to determine what is suitable for the client. An advisor should not simply rely on the name of any portfolio to determine what is suitable. Cabana manages assets on multiple custodial platforms. Performance results for specific investors may vary based upon differences in associated costs and asset availability.
Cabana claims compliance with the Global Investment Performance Standards (GIPS®). GIPS® is a trademark of the CFA Institute. The CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein. To receive a GIPS Report and/or a firm’s list of composite/pooled fund descriptions please email your request to firstname.lastname@example.org.