Denk Strategic Wealth Partners

Weekly eLetter 2/10/2023 – Doldrums?

For centuries, all around the world sailors operating in waters near the equator have been concerned about getting caught in the doldrums which, technically speaking, are regions of light ocean currents and winds within the intertropical convergence zone. In the time of the great sailing ships, getting caught in the doldrums could mean being stuck out at sea for an undeterminable amount of time.

I bring this up, not as a warning to our clients who may be sailing the high seas but instead because it is a good analogy to our current investing climate.

Just last week our eLetter found a reason for optimism springing from Fed Chair Powell’s comments about ‘disinflation’ and, sure enough, the markets were also impressed. However, this week has seen a new round of chicken-counting. Among the chicken-counters is Jamie Dimon. Jamie is the big cheese at JP Morgan and his opinions always seem to carry a lot of weight. It’s sort of like that old TV commercial that had John Houseman saying “When E.F. Hutton talks, people listen.”

On Wednesday of this week, Dimon was speaking in an interview with the Reuter’s News Agency, and he commented on Powell’s disinflation sentiment: “I just think people should take a deep breath on this one before they declare a victory because a month’s number looked good.” He then added that he thinks it’s perfectly reasonable for the Fed to go to 5% and wait a while and see (the lagged effects of its policy on inflation in the economy). But, then what? Well, here’s more from Jamie: “…if inflation comes down to 3.5% or 4% and fails to budge, the Fed may have to “go higher than 5% – and that could affect short rates [and] longer rates.” We think Dimon is always a guy to whom should be listened. He does his homework, and we really like homework.

Dimon’s position is also shared by Federal Reserve officials, who have consistently asserted the terminal rate for its current hiking cycle will likely be above 5%.

All that being said, let’s return to our opening theme, the doldrums. It is true that there are some brilliant minds out there doing some heavy thinking. However, there is also no shortage of crosscurrents being generated by a diversity of opinions, not to mention surprises — like the last ‘jobs added’ number two weeks ago that came in at over 200% higher than anyone’s forecast).

Barring some catalyst, we may be wandering around doldrum-land for a bit longer.

Ron’s Market Minute — the Secret Sauce

Ever since Charles Dow started using charts (late 1800’s) to track the one index that existed at that time (the Railroad Stock Index*), technicians have used charts to determine which investable areas were the strongest part of an index. Originally all charting was done by hand and was an extremely time-intensive project. Each stock originally had to be charted by hand and then one could eyeball the different charts and compare them to the index to see which appeared stronger.

Today technicians use software to do the grunt-work, and like most advisors, we use a bit of number-crunching technology to do the heavy lifting for us. As we mentioned in the e-letter above, markets appear to be in rather a doldrum at this time. However, we can use charts of ‘relative strength’ which you’ve heard us discuss often in the past.

Even when larger indexes such as the S&P500* Index seem to be a bit less-than-directional, we can use relative strength charts to compare the strength of any part of the index (typically mentioned as ‘sectors’) to the index as a whole. Portfolio designers then typically use the strongest parts of the index as their cores rather than the whole index. It should make sense that investing in the stronger parts of an index should give a return at least equal to the index.

As you know, there is no ‘magic bullet’. However, relative strength tools and software have been used successfully for many years to attempt to keep client portfolios on the right side of market strength.

Ronald P. Denk, CFP®
Investment Advisor
Denk Strategic Wealth Partners

10000 N. 31st Avenue, Suite D406A
Phoenix, AZ 85051
Phone (602) 252-8700
Fax (602) 252-8701
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www.denkinvest.com

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Past performance is not a guarantee of future returns – LFS-5390884-123022