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The Tide, The Current And The Waterfall

When I started SEDNA Wealth Management I wanted to choose a name that reflected my overall investment philosophy. SEDNA derives from Inuit (Eskimo) mythology and means “Goddess of the Sea”. In my opinion financial markets often behave like water. Water can be calm one one moment and become forceful and violent almost instantly. Over time water will go through cycles and will transform into storms, floods, and hurricanes or can even disappear during a drought. However water will always seek to find a balance over time. The same can be said for financial markets.  Like water, as investors we will experience financial storms or rough periods that if not properly prepared for can sometimes be tragic for our investments and overall wealth. That’s why SEDNA Wealth Management strategizes to help with our clients to navigate the financial waters and guide your overall wealth throughout your life.

The Tide, The Current and The Waterfall

As I share market opinions in future newsletters, I plan to speak in relation to three market factors that I believe have the most influence on market prices over time – These are Market Cycles and Fundamentals, Market Trends and Market Technicals. As SEDNA describes our views of different markets we’ll continue to use our water analogy to describe how markets are moving similarly to movements in water. The Tide, The Current and The Waterfall will be a consistent theme in describing these important investment themes. The Tide represents Market Cycles and Fundamentals as ocean tides often causes water to move up and down in a fairly predictable patterns. The Tide going out can also deliver rapid price changes in fundamentally bad companies who may have rode a market rally during good times. The Current represents Market Trends as water current can for short periods of time cause very fast movements. The same is true in financial markets, where market trends can lead to price rises for a set of companies or sector.  Finally Waterfalls represent Market Technicals.  At SEDNA we truly believe that because of the securities’s industry growing use of technology, markets are driven more and more by technicals factors and the study of historical market data. Waterfalls create an image that relates to markets that look calm and steady until that stock or index crosses a certain technical level and then they seem to fall off a cliff or do the opposite.

The Tide

(Market Cycles And Fundamentals)

One of Warren Buffet’s most famous quotes “You never know who’s swimming naked until the tide goes out” is probably the best way to describe the stock market conditions today. At the beginning of 2020 I would classically describe most sectors of the equity market as overvalued and needing continued company earnings growth to sustain its lofty levels. As COVID-19 took its grip on the world globally, financial markets made a huge downside correction in March and early April. That correction was short lived as most indexes have made a full recovery over the last three months led by fed intervention and government stimulus. However when you look a little deeper the market displays some deep concerns that everyone should take notice of. Without going into elaborate detail, The FED bond buying program has created the idea of a FED put in equity markets and fueled a resurgence of money into bond markets. Referring back to the Warren Buffet quote, this is allowing most companies access to cheap capital no matter the business fundamentals. Unfortunately, this is creating an environment where companies that should go in bankruptcy given the current economic environment can obtain enough money to stay alive. Essentially creating a lot of zombie companies.

The Current

(Market Trends)

The overwhelming trend in the market today is that growth stocks primarily technology stocks continue to outperform everything else. The S&P 500 is now positive by 2.5% (as 7/31/20) for the year. However, that is a little misleading as most of the companies in the index are negative for the year. Only 186 of the 500—37%—show a positive gain and of the remaining 314, or 63%, 226 are down at least 10%. Technology, Communication and Consumer Discretionary stocks have been the big winners post COVID-19 and are the only positive sectors this year. The market is clearly rewarding companies that have been least impacted by the slowing of business related to the virus and as we have moved into a virtual way of doing business, technology companies have been greatly rewarded.

The Waterfall

(Market Technicals)

A large part of SEDNA’s investment process is to continuously monitor several technical indicators to determine the best time to add, trim or exit different asset classes in our portfolios. The SEDNA Compass Risk Report (see link below) uses a proprietary model using price, volatility and trend to evaluate the investment opportunity for different asset classes. This report coupled with a couple indicators not featured in the report are highly useful in determining when to make changes in each client’s portfolios. We like to say that investors should monitor fundamentals to determine what to buy and sell and monitor market technicals to determine when to buy and sell those assets.

Thank you for reading this month’s newsletter and sharing with others.


Rick Drew, Managing Director

August SEDNA Compass Risk Report


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