Spotting a trend early can make you a lot of money. Recognizing a trend late can lose you a lot of money. That seems simple enough. But all trends are not alike. There are dominant trends, sub-dominant trends, counter-trends, etc. Market watchers like to say things like “The trend is your friend.” That has a nice catchy lilt to it and, most of the time it tends to be borne out by positive results; but not always.

Understanding the validity of a trend is a worthwhile pursuit. If we know what is driving the trend, we can extrapolate some data points to help us predict probable futures. We don’t always get clear pictures but soft or blurred images can still be very valuable. Think of it as financial pointillism.

It probably goes without saying that the dominant trend this year is the Return to Normalcy trend which has replaced the End of The World as We Know It trend. But wait! A new sub-dominant trend has appeared in the form of the ‘Delta Variant’ of Covid-19. The dominant part of the Delta Variant trend is that it is ‘significantly more contagious’ than earlier strains. The counter-trend info is that it is also significantly less deadly. Sadly, most of the discussion has been drowned in politics. I swear, there are days when one could be convinced that some people are actually rooting for the virus!

For some firmer footing on the story, let’s take a look at the UK where the Delta Variant seems to have already reached its peak and may be on the wane. Again, it may be pointillism to suggest that whatever happens in Jolly Olde will be repeated here, but scientific projections do rely on replication. Interestingly, UK Prime Minister Boris Johnson has increasingly taken a laissez-faire approach to mandates of mask wearing, ‘pandemic passports’, etc. while States-side the battle of government dictate vs personal responsibility rages on. Johnson appears to have a lot of public support for his policy although even he allows that the high contagion Delta infection rate will likely climb higher. The bet is that the death toll will not rise with it. On our side of the pond administrative policy is, shall we say, fluid. Complicating the argument is that experts increasingly shift their positions — which can only add to public confusion.

If there is anything good about the Delta spike, it may be that it is convincing more people to get themselves vaccinated. An idea we support.

Ron’s Market Minute — Bomb Dropped on Wall Street

Well, not literally, but it had that effect. Let me explain. For those of us who have been around the markets for a while (say at least 25 years) we used to sort of keep an eye on Berkshire Hathaway as an indicator of strength in the markets. Today, Amazon (AMZN) tends to be a similar kind of indicator. When Amazon is strong markets tend to also be strong. Last week I had mentioned to several people that I expected good solid earnings and guidance from Amazon, and that the solid earnings would likely slop over into several other parts of the market – in a positive way. 

So, at the close of Thursday’s market when Amazon announced weak earnings, AND gave disappointing forward guidance, I was rather surprised. Indeed, who wasn’t? This morning’s stock market futures (we like to check them about an hour before markets open as a clue to what the day is likely to bring) were very weak as many areas of the market were affected by the weak news from Amazon.

The group of broadline retailers appeared to be following Amazon’s poor showing today.  Perhaps it’s because as the economy continues to open, real (brick and mortar) businesses will be potentially taking back some of the sales that were captured by online sales of Amazon. That’s a guess, but sounds plausible. (Disclosure: We own AMZN and like the company a lot, but must say that it’s technical weakness today opens the door to potentially lower prices as we move ahead.)

The consumer discretionary sector an aggressive sector (made up almost a third by AMZN) is also looking weak. As I write this, it is down almost as much as AMZN stock. 

And as we might expect, as the aggressive sectors drop, the defensive sectors are having a better day. Utilities, Consumer Staples, Real Estate, and Health Care are looking relatively positive. As you know, we try to own the stronger sectors, and avoid the weaker ones. In a bullish-leaning market the aggressive sectors tend to lead. And defensive groups lead in a bearish-leaning market. 

When defensive stocks lead (like today) in an otherwise bullish market, it indicates a potential change in mentality of traders and investors. That’s problematic. We’ll be continuing to watch the strength of the defensive sectors and looking to see whether there’s a change of trend.

Ronald P. Denk, CFP®
Investment Advisor
Denk Strategic Wealth Partners
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Phoenix, AZ 85051
Phone (602) 252-8700
Fax (602) 252-8701
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www.denkinvest.com

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