The following post was originally issued to TLS members on January 31, 2020.


Is it time for investors to seek shelter?

Global equity markets are in a steep decline amid the outbreak of the coronavirus. Widespread quarantines in Asia and elsewhere around the world are being instituted in order to stop the spread of the virus. In terms of the market impact, should investors be thinking about “quarantining their portfolios against risk, i.e., should they think about a wholesale exit out of risk assets like stocks? In our professional opinion — nope. Until we see more OBJECTIVE evidence, e.g., via our quantitative Risk Model, market conditions still suggest holding — and even selectively adding to — one’s equity exposure. That is, of course, in select areas and at select levels.

Sure, if we had not taken steps to reduce risk recently, we would be sweating this pullback a lot more than we are. However, as members are aware, between 1/15-1/17/2020, TLS went to a Short-Term Bearish Outlook for the first time in months. As you also know, we undertook some significant profit-taking in our portfolio at the time. This was due to an elevated level of near-term risk based on an analysis of both charts and investor sentiment. That risk has since been manifesting itself in a steep selloff in global equities. Fortunately, the profit-taking has sort of “quarantined” us from taking heavy losses during this week’s pullback — and importantly has quarantined us against feeling the pressure of having to raise cash levels into the steep decline. So what now?

On Monday, the first bout of significant selling pressure occurred, taking nearly all major averages and sectors down to key initial levels of support. As we have been mentioning recently, however, our recent assessment of elevated risk has had us more patient in trying to BTD (Buy The Dip) than we have been over the past 4 months or so.  In other words, we have been waiting this week for more significant levels of support to be reached as opposed to merely the initial levels that were hit — and held — on Monday.

As we’ve been saying in the DSS Videos, our favored scenario in the pullback was an A-B-C type decline that brought stocks down in the initial “A-wave” to Monday’s low, followed by a dead-cat bounce/consolidation (i.e., Tuesday-Thursday), then another “C-wave” down, on the order of magnitude of the initial A-wave. The C-wave appears to be unfolding now and has various indices and ETF’s approaching our “more substantial” levels of “BTD-able” support. And again, until our Risk Model flips Bearish, we will continue to BTD in relative strength areas at support.

So what are we looking to buy — and at what levels? Here is our partial shopping list and ideal entry points:

  • IHI:  ~262.50
  • EWT:  ~37.35
  • ITB:  ~47.28 (may wait for 45.80)
  • XSD:  ~101
  • XLK:  ~92
  • XLV:  ~99.15
  • IHI:  ~262.50

Key support levels of other indices and associated ETF’s:

  • S&P 500:  ~3195
  • SPY:  ~318.90
  • Nasdaq 100:  ~8725
  • QQQ:  ~212.70
  • Russell 2000:  ~1610
  • IWM:  ~160

As always, stay tuned to the Daily Strategy Sessions every AM as we cover our “shopping lists” and all of our potential moves on a daily basis.

If you’re interested in the daily “all-access” version of all our charts and research, please check out our site, The Lyons Share. You can follow our investment process and posture every day — including insights into what we’re looking to buy and sell and when. Thanks for reading!


Disclaimer: JLFMI’s actual investment decisions are based on our proprietary models. The conclusions based on the study in this letter may or may not be consistent with JLFMI’s actual investment posture at any given time. Additionally, the commentary provided here is for informational purposes only and should not be taken as a recommendation to invest in any specific securities or according to any specific methodologies. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.