Video Transcript:

Hello everyone. Brent Chavez, Aequitas Equitas Investment Group. I hope this video finds you well. It is Thursday afternoon, and we are in the midst of a market crash that is somewhat unprecedented in it being a draw down in such a short period of time. I just wanted to give you a follow up and tell you again, where we stand, a follow-up to the two videos I sent you this last month of what we’re doing to protect your portfolios, has been working tremendously. But, I want to go a little bit deeper as to what we saw, what we’re seeing that made us do something that is very rare for us as a practice to go so defensive. As many of you know, it’s not something we like to do, those that have been with us for a long period of time. 

I’m going to share with you some things that we saw going on at the end of January that concerned us. As I mentioned in my video from January, we had had a big run up. We had stretch valuations in the markets. We were seeing a flight to bonds, globally, inflows to bonds were really up ticking. And as the yields were dropping, buyers would come in, grab those bonds. No matter how low those yields were, buyers were showing up. And at the same time seeing the deterioration of the many individual stocks in indexes in sectors globally that was a concern to us. We’re going to touch on again this is not going to be all encompassing of what we’re looking at for you on a daily, weekly, monthly basis, but just a little bit deeper than the last two videos have been. 

So again, back here in January, the S&P had hit a short term target that we had around 3300. We had noticed as we looked around, there were some canaries in the mines and red flags, so to speak. We’re going to take a look at them.

We see here some sideways action in the S&P 500. We saw it ticking up for a few weeks after we went defensive with all your portfolios, but we felt that that was more or less a “sucker’s rally,” as I like to call people being taken in before the fall off the cliff, potentially was going to take place. We’re here today as we do this video around 3000, a little over 3000. So again, a pretty sizable pullback in a very short period of time, not something that we knew was going to happen, not something that we said was absolutely going to happen… we actually said we don’t know what tomorrow brings when it comes to the stock markets. The only thing we can do and we do do for all of you is to look at the data and make educated decisions based on the data that we see come in. 

We’re going to move a little bit further into our next chart. 

Here was something that got concerning here over a couple month period – this is the chart of the 10 year Treasury. We saw yields collapsing in that 10-year. It touched against 1.39 for the 10-year Treasury. But the problem was, buyers kept showing up, flows kept going that way, it was a little bit of what we thought to be a warning sign. In fact, a very important chart to look at as to why we want to be more neutral and defensive in our portfolios. It has collapsed through this resistance and I feel moving forward we’re going to see much lower yields, much lower interest rates, Federal Reserve it’s important for you to come into lower rates. We’re getting less and less ammo… as you see the scale, we’re getting to the fractions because there’s not much to zero from here. So again we’re concerned, though, that it may push lower for the foreseeable future. So we want to stay positioned as we are for now. 

The next chart that we’re looking at is the financials. 

I talk about being able to have confirmation besides the S&P and the Dow Jones. Looking at the charts we want to see some other charts that really give us confirmation that these moves are real, that there’s more than just a handful of stocks like the S&P 500 – basically you have 5 stocks pulling it up the last several weeks, the big mega cap stocks, where the rest of the stocks in that index were breaking down, deteriorating from a technical standpoint. Financials is an important part to any stock market rally that is sustainable or able to move forward. In the past I had talked about this resistance, all time highs in the XLF ETF representing financials in the S&P 500. All time high back in 2008, we hit it in ‘16, pull down before the next several years sideways, and than finally joined the rally of the S&P 500. But, again hit that resistance and the S&P 500 continued to move up and financials moved sideways… no confirmation that this rally had legs to move much higher. 

We’re going to see that on a chart here. 

Here’s where we see confirmation of the S&P, in purple, XLF moving, confirming these moves up. We started seeing issues and real big issues here (past few weeks), a canary in the mine. 

Let’s look at our next chart and data we’re looking at. 

The Dow Jones Industrial one of the indexes that every night you see or hear in the news, “record high” with the S&P 500, the NASDAQ.  When the Dow Jones Industrial is making moves we want some confirmation that it is a real sustainable move. And we want to get that confirmation from the Dow Jones Transports, DJT. What is the difference? 

Well, here’s the light blue line, this is the Dow Jones Industrial, again you see that on TV every night, the dark blue line is the Dow Jones Transports. So the Dow Jones Industrial, 30 industrial companies, making a lot of goods that Americans consume and the globe consumes. So with that being said, the companies that move the goods throughout the country throughout the world should be doing similarly good. And we saw something that happened, starting back at the end of last year, we started to see a separation of those charts. We started to see that we were not getting confirmation. When I sent out the video back in January, the Dow Jones Industrial had done about 13% in the last year and the Dow Jones Transports had done 3%.

So again we were seeing a divergence that was growing and growing – red flag or a canary in the mine. Again, a big divergence was taking place here in January, a sign that not all was well for the markets to continue much higher and uninterrupted with some form of a pullback. 

Let’s look at our next piece of data we were looking at. Oil. 

Because what happened was the markets were humming along, hitting all time highs, but oil was falling off the cliff, about $10 a barrel, in that very short period of time of about a month. If the economy’s rocking and rolling, the global economy is ready to take off and help support the S&P 500 and Dow Jones companies to really help their evaluations from a fundamental standpoint and help them grow into 2020, 2021… but, oil was telling a different story. Again, it was another thing that had us concerned that we might want to be more defensive in our posture. 

Here’s another chart that we want to take a look at. 

So, back to the positions we moved to, very defensive – treasuries, municipal bonds, 10 and 20-year treasuries, and utilities – all very defensive in nature in our portfolio build. Here’s why. Inflows represented by these three here, treasuries, municipal bonds, 10 and 20-year Treasury. We saw inflows starting back here (end of January, beginning of February) into bonds, very high. We had this continuation of a rally again that had no support, no confirmation from any of the other sectors that the yields from the treasuries on the 10, 20 or 30-year, were crashing. And ultimately, here’s what has happened. Look at those treasuries and municipal bond positions up and then your S&P 500 and Dow Jones down this past week. 

So again, it was the correct move to make it that time. And again, this is just part of what we’re looking at. We also look at credit spreads and many other things that most of you would probably find boring – basically, you’d probably rather go to the dentist and have your teeth cleaned then hear about all of those other things. But this is what we eat, this is what we breathe, this is what we love to do.

I want to thank all of you for allowing me to be part of your life. If you have any questions, any concerns about what we’ve discussed and what you’re hearing, please feel free to give me a call. Because at this point, as I mentioned in the other videos, the Coronavirus was that outlier, the icing on the cake. All this data that we were looking at, that was really the thing that said hey, I don’t think it’s being factored in. I don’t think China is telling us the whole story. We don’t know where that’s going to play out at this point and that’s far from over and we don’t know how that is going to affect our projections moving forward. But, time will tell.

So, in the meantime, we will be defensive. We will be here to answer any questions – give us a call, and have a wonderful sunny Thursday afternoon.

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*Charts are from Yahoo! Finance and JC Parets

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