Another Busy and Volatile Week Ahead for Investors

With the US Presidential election overshadowing everything next week, there will be plenty of other news that investors will also have to pay attention to, including more earnings reports (some of the more notable companies reporting next week include Estee Lauder, Skyworks, Humana, Clorox, PayPal, Eaton, Emerson Electric, Qualcomm, TMobile and Roku), the Fed meeting, unemployment numbers and new COVID developments, among other things.  Like last week, where pretty good economic data and corporate earnings were swamped by election and COVID jitters, next week is likely to be more of the same.  Indeed, the major averages like the S&P500 (SPY) are testing key technical support levels (see red lines in the chart below - the first level of about 3200 is close to being broken and the next level of strong support looks like about 3000).  SPY is showing strong signs of further downside risk - perhaps as much as 8% from Friday's close if it drops down to the next level of support (second red line in the chart below).  

Should the election outcome not be clear on Tuesday, the volatility could continue for weeks or even up to 30 days.  Also, the market will likely be set to open down on Monday with the announcement that the UK will go to a nationwide COVID lockdown for one month, following similar actions in France and Germany earlier.  What's an investor to do?

Well of course, it's best not to panic.  If you own good companies, all this turmoil will eventually pass and investors will begin to focus on the fundamentals again.  Trying to time the market is a loser's game.  If you want to speculate in market volatility and short-term downside, I like ProShares Ultra VIX Short-Term Futures ETF (UVXY), a 1.5x leveraged VIX ETF.  I think it's best not too get to aggressive with something like this, keep your position small and focus on short-term trades, especially since the longer term trend has been down since the March market lows - indeed it has already gone up over 24% in the past week, so unless the market has a big downward break (which as discussed previously is certainly a possibility), further upside to UVXY could be limited.  

Diversification continues to be a central theme that I hear from the professionals.  What's interesting about last week however, is that investors were selling bonds and stocks at the same time, which is odd since typically they are inversely correlated.  Possibly this is because government spending is expected to increase next year with fiscal stimulus, which will put upward pressure on interest rates, so why hold bonds now when rates are set to go up and you can buy later for a better yield?  It could also just be investors wanting to move to cash to await the election results next week for safety and to take advantage of any opportunities the market presents to "buy the dip."

If you have built a Financial Fortress for yourself, you are already broadly diversified in a range of different asset classes and also have ample cash for emergencies.  As such, your stock portfolio should continue to be fully invested in quality companies with good long term prospects.  Many are saying the FAANG stocks should be avoided now, but they continue to have great earnings and growth stories and recent interest in government regulation of those companies could actually work out in their favor by stifling upstart competitors.  Also outright company breakups are rare, but in that unlikely event could unlock tremendous shareholder value.  It seems too early to write off the FAANG story as similar to the Tech Bubble of 2000.  The big difference is these companies are making money and most actually trade at a reasonable multiple of those earnings given their growth prospects. 

The Financial Fortress approach would ensure that you are broadly diversified across asset classes and your stock trading portfolio should not be a large component of your overall financial picture, so even if you suffer heavy losses (which shouldn't happen if you are managing risk appropriately), the impact to your net worth should be minimal.  The diversification in your stock trading portfolio need not include other asset classes like bonds or real estate, unless you don't have exposure to those areas in other parts of your Financial Fortress.  I'm not recommending any particular stock or strategy.  Stay safe, healthy and positive.  

I hope you find this post useful as you chart your personal financial course and Build a Financial Fortress in 2020.

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