Flying Blind

As we continue to heap uncertainty upon uncertainty as to the future course of events in Ukraine, investors are reacquainting themselves with their risk tolerance - or lack thereof. If the pandemic didn't do enough to generate that realization, these past few weeks have. I have no ability to forecast events, either positive or negative, that will drive short-term investor expectations now. It is well above my pay grade and I'm not tempted to even try. That unfortunately is the intrinsic nature of risk tolerance - to make decisions based on incomplete certainty. How much to bet? How to hedge tail risk? What downside are you willing to endure?

Experienced investors, like most of you now reading this blog, will have already taken steps to at least partially prepare your financial affairs for downside surprises. The risk/return balance was against the bulls even before the Russian invasion, given the Fed pivot to a policy of liquidity removal. Not unexpectedly, the main question being asked now is when do I go all-in on the market? The short answer is - I don't know. As disappointing as that is to say, that doesn't mean I am recommending a complete risk purge. On the contrary, most often the onset of war is has been an excellent time to increase one's risk status. I dredged up the hoary old quote from early investment literature and attributed it to London financier Nathan Rothschild. The phrase “buy on the sound of cannons, sell on the sound of trumpets” suggests that the start of a war is a good time to invest in the stock market.

In last week's missive, now beyond stale-dated, I portrayed an optimistic view that Putin would be satisfied by his 'bluster, not bullets' approach. Two days later, he put paid to that pollyanna notion. We now have to admit that we have drastically underestimated his base level of evil.

All of this discussion seems to be a callous and self-centered attempt to profit from the misery of others, in this case, the innocent Ukrainian people. It will be a pyrrhic victory for anyone who gains from this approach. But capitalist profit equation has no variable for morality. So if it's investment advice you are looking for today, don't expect much in this message. Find your own comfort level and stay there. But at the same time, a donation to the Red Cross might also be in order.

Risk Model: 2/5 - Risk Off

Understandably the model remains cautious as the elevated VXV and depressed AAII sentiment and bombed-out Copper/Gold ratios remain in risk-off mode. The two positive readings are from the position of the XIUs above the 200 dma while the RSI is hovering around neutral.

The U.S. market, not as hard-asset rich as the TSX, has fared worse, leading to a pronounced breach of the major downtrend in the relative performance of Canadian stocks to their American equivalents. The era of mega-cap dominance of the equity markets is drawing to a close and left behind areas such as small-cap, commodity cyclicals, and non-U.S. equities will now have a better chance to outperform. Given the backdrop of growing scarcity in the commodity arena and the level of rigidity to the supply response to those shortages, I'm expecting this to be the beginning of a very long trend of mean reversion for Canadian equities as well as the underlying currency. The Loonie similarly looks destined for higher levels.

Canadian vs U.S. Relative Performance