Table of Contents
“There is only one side to the stock market; and it is not the bull side or the bear side, but the right side.” – Jesse Livermore
Anyone who follows the equity market realizes that they are faced with what I described last week as a foggy outlook in the near term. When that occurs, I try not to get swayed and then sidetracked into forgetting the long-term trends that are in place.
An investor has to be reactionary waiting for the market to give them clues, then reacting appropriately. I take my leads from price action, momentum, sentiment, and other indicators. All designed for me to decipher what the market is telling me. Never drifting too far from the one key that serves as the foundation of my current strategy. That is staying focused on the major trend that is in place, and that remains without question in favor of the bulls.
Once established that trend should be followed until there is evidence that a discernible change is taking place. This bull market has been marked by the masses that keep looking for reasons to abandon this trend. As each month passes, another reason is rolled out why the equity market is filled with more downside risk than upside gains.
Sentiment as a contrary indicator has been a tailwind for anyone bullish. Excessive bullishness would imply the exhaustion of buying power. What we have witnessed for quite some time is that traders and investors appear to be subdued and cautious. The new highs recorded for the S&P just one month ago and the 42 all-time highs recorded by the NASDAQ in 2020 should have given a boost to enthusiasm for equities. Instead, it is met with a yawn.
Major market tops simply do not occur with the amount of pessimism that is apparent. When gains are being recorded, many investors make the mistakes of constantly looking around and believing the next bear market is always coming at some point. Many live in fear of being the last fool by owning stocks now.
I don’t believe anyone who has stayed the course to date is the last fool by any stretch of the imagination. The last fools will be here when everyone wants to own stocks. There isn’t a shred of evidence that suggests that is occurring now. It could easily be said the fools (first or last) are the folks who have doubted the bull market for months and years now. They have questioned and badgered the bulls for being the fools as they sit around finding faults with a winning strategy.
Many are saying it is time to hit the exits, there is no reason to hang around for menial gains with big downside risks ahead. Perhaps this time they will be right. I’ll wait and do what has been a good strategy. Follow the primary trend and avoid all of the discussions that are simply meaningless.
The Week On Wall Street
The economy suffered a forced recession and we are less than 30 days from what is expected to be a contentious presidential election. The President’s health became a major issue last Friday adding more uncertainty to the short-term picture. Not many would have thought entering the first full trading week in October that the S&P would be just 6.5% from an all-time high. While the NASDAQ composite was up 23% and stood at 8.5% from its last all-time high.
Monday’s price action ignored all of the media noise, followed the economic data, and moved higher. That fooled many investors who had a “feeling” the market would be stumbling given the negativity that is dominating the “headlines”. All major indices closed higher by more than 1.6% with the Russell small caps again leading by posting a 2.8% gain followed by the NASDAQ up 2.3% on the day. All sectors participated in the gains with Biotech (IBB) +4%, Semiconductors +3%, and Energy (XLE) +2.9% leading the way. Advancers outnumbered decliners roughly ten to one, and for the Dow, every component finished the day higher.
A quick reversal in afternoon trading gave back most of Monday’s gains for the major indices, and that kept market uncertainty at a HIGH level. Tuesday’s price action saw the index post an intraday high at 3,431, before reversing and closing lower. That came after the President took a stand on the stimulus negotiations as he pulled the plug on the Dem’s latest proposal. All major indices sold off, as it did turn out to be “Turnaround Tuesday” after all. All sectors were lower on the day as well.
Investors were met with a sea of green as the market opened on Wednesday. The hint of some targeted fiscal support along with continued positive good news on COVID-19 treatments reversed all of the losses on Tuesday. With the one-day “stimulus tantrum” in the rearview mirror, all of the major indices closed higher by more than 1.7%, with Dow Transports up 2.5% and the Russell 2000 gaining 2.1%. All sectors were positive, and every Dow 30 component was higher as well. It was yet another 80% upside day, the third in the past eight sessions.
The Dow Jones Transportation Average and S&P 500 Advance-Decline line closed at new all-time highs, while the small-cap Russell 2000 closed at its highest point since February. The new all-time high for the Transports is being accomplished with no assistance from the Airlines, and when we add in the recovery high for the Russell Small Cap Index, it confirms the secular Bull market trend in place. It dovetails nicely with what we are seeing in the S&P 500.
No stimulus, no problem as the rally continued in the final two trading sessions. There was strength across the board accompanied by strong market breadth. For the week the Russell 2000 vaulted higher by 6+%, the Dow Transports rose by 4.9%, and the NASDAQ composite remained in demand gaining 4.4%. Both the Dow 30 and the S&P posted gains over 3+% as well.
There was finally some buying in the Energy sector as the Energy ETF was up 5% for the week. Every S&P sector closed higher as trading ended for the first full week of October.
Global stock markets remain in sync as they all rebound from oversold levels back to “neutral”. Singapore (Full disclosure: I own shares of EWS) tops the “income” list with a 3.9% dividend yield. When it comes down to forward-looking PE, China remains the most inexpensive.
Two indices are levered to the global economic cycle, Taiwan (TWSE) and Korea (KOSPI). Both show a major pivot area acting as support. As long as the KOSPI stays above 2,270 and the TWSE stays above 12,250, it’s hard to get too worried about the global growth outlook. Conversely, breaches of those key levels would be a good signal that the cyclical picture has shifted towards the downside after consolidating since mid-summer.
Both countries reported vastly improved manufacturing PMI readings this past week, and that did indeed bolster their markets as both reached recovery highs. Korea PMI now stands at an eight-month high, with Taiwan coming in with the highest reading since March 2018.
Consumers continue to pay down consumer debt with the total falling 2.1% year over year in August led by an 11.3% decline in revolving (credit cards, etc.). Non-revolving (auto loans, etc.) up 0.8%.
Another brick in the “Consumer is doing OK” wall, as the “Dire straits, we all need more stimulus” argument dissolves.
If anyone still needs more evidence, the weekly report showing active mortgage forbearance cases dropped off a cliff. The largest single weekly decline since the pandemic.
For sure there are pockets of the economy that continue to require assistance, but the “millions will lose their homes” narrative is losing credibility.
The seasonally adjusted final IHS Markit US Services PMI Business Activity Index registered 54.6 in September, down slightly from 55.0 in August, but matching the earlier released “flash” estimate. The solid rise in business activity was commonly linked to stronger demand conditions. The rate of growth was the second-fastest since March 2019 and solid overall despite softening from that seen in August.
Chris Williamson, Chief Business Economist at IHS Markit:
“The U.S. economy continued to rebound in September from the deep contraction seen at the height of the Covid-19 pandemic, with business activity rising across both manufacturing and services to round off the strongest quarter since early-2019. “Covid-19 worries and social distancing continued to impact many businesses, however, especially in consumer facing sectors, where demand for services fell once again. However, business and financial services, healthcare and housing sectors all fared well as the economy continued to revive, and exports of services also picked up as other countries continued to open up their economies.”
“Encouragingly, new orders for services grew at an increased rate in September, putting additional pressure on operating capacity and fuelling another robust rise in employment. A further rise in backlogs of work bodes well for robust jobs growth to be sustained into October.”
“Sentiment on prospects for the coming year darkened significantly, however, linked to growing worries about virus numbers, uncertainty regarding the presidential election and fears that the economy is susceptible to weakening unless more support measures are put in place soon.”
September ISM services index rose 0.9 points to 57.8, better than expected, and recovering most of the 1.2 point drop to 56.9 in August. This is the best since the 58.1 in July which was a 17-month high, after bouncing from the 11-year low of 41.8 in April. It was at 53.5 last September. The employment component climbed 3.9 points to 51.8 from 47.9 and is up from 30.0 in April and is the highest since 55.6 in February. New orders increased 4.7 points to 61.5 from August’s 56.8 and April’s 32.9. New export orders declined -3.2 points to 52.6 versus 55.8, while the imports index dropped -4.2 points to 46.6 after bouncing to 50.8 in August. Prices paid fell back to 59.0 from 64.2 and compare to 50.0 in March.
The Business activity sub-index picked up to 63 and remains near levels last seen in 2003.
U.S. JOLTS reported job openings fell 204k to 6,493k in August after rising 696k to 6,697k in July. Openings had been on the rise from May through July after cratering from February through April to 4,996k (the lowest since December 2014). The rate slipped to 4.4% from 4.6%. August hirings edged up 16k to 5,919k following the -1,067k plunge to 5,903k (was 5,787k) previously, with the rate steady at 4.2% There was a -139k decline in quitters to 2,793k in August after the 327k increase in July to 2,932k The rate dipped to 2.0% versus 2.1%. The erosion in some of the stats is disappointing, but not necessarily surprising amid the dislocations in the labor market due to the pandemic, the relief packages, and the expiration of some of the benefits.
Initial jobless claims fell -9k to 840k in the week ended October 3 after dropping -24k to 849k in the September 26 week. That left the 4-week moving average slightly lower at 857.0k from 870.3k. Claims not seasonally adjusted edged up 5.3k to 804.3k following the prior week’s -28.2k slide to 799.0k. Continuing claims dropped -1,003k to 10,976k in the September 26 week after falling -768k to 11,979k in the September 19 week.
Globally, the Manufacturing PMI results across all countries tracked rose 0.5 points to 52.3, the highest level since August of 2018.
The J.P. Morgan Global Composite Output Index, which is produced by J.P. Morgan and IHS Markit in association with ISM and IFPSM posted 52.1 in September, down marginally from August’s 17-month high of 52.4. Output growth was registered in both the manufacturing and services sectors, although rates of expansion ticked lower. The increase in manufacturing production remained faster than that signaled for service sector business activity.
Olya Borichevska, Global Economist at J.P. Morgan:
“While the slight dip in the global Output PMI in September was disappointing, there remained several positive aspects to the latest surveys. The trend in new orders strengthened, international trade PMI increased above 50 for the first time since August 2018 and the labour market stabilised following its recent deep retrenchment. This should place the global economy on a firmer footing to sustain the recovery especially if the re-opening process continues during the final quarter of the year as expected.”
The growth of the eurozone’s private sector slowed further towards stagnation in September. The IHS Markit Eurozone PMI Composite Output Index slipped to a three-month low of 50.4, down from August’s 51.9 and indicative of only a marginal expansion. The final reading was, however, firmer than the earlier flash estimate (50.1).
Chris Williamson, Chief Business Economist at IHS Markit:
“With the eurozone economy having almost stalled in September, the chances of a renewed downturn in the fourth quarter have clearly risen. Spain has been especially hard-hit as rising Covid19 case numbers led to further disruptions to daily life. With the exception of the March-to-May period at the height of the first wave of infections, Spain’s service sector contraction in September was the largest recorded since November 2012.”
“However, renewed service sector downturns were also recorded in France and Ireland, while a near stalling was recorded in Germany, underscoring the broad-based geographical spread of the worsening service sector picture. Virus containment measures remained particularly strict in both Spain and Italy during September, and were also tightened in France and Germany”
“Much will depend on whether second waves of virus infections can be controlled, and whether social distancing restrictions can therefore be loosened to allow service sector activity to pick up again.”
Monthly numbers from Germany’s statistical agency showed larger-than-forecast growth for new factory orders in the month that totaled 4.5%. As shown below, foreign orders surged 6.5% and are almost back to February levels. Domestic order volumes have been much weaker but are also rebounding.
At 54.8 in September, the headline seasonally adjusted Caixin China Services Business Activity Index was up from 54.0 in August and signaled a fifth successive monthly increase in service sector output. Notably, the rate of expansion was the sharpest for three months, and among the quickest recorded over the past decade.
Dr. Wang Zhe, Senior Economist at Caixin Insight Group:
“Overall, the economy remained in a post-epidemic recovery phase and improved at a faster pace. Supply and demand both expanded in the manufacturing and services sectors. The gauges for orders, purchases and inventories all remained strong. Price measures remained stable. The reading for business expectations remained positive, reflecting strong confidence in the economic outlook for the year ahead. Employment in the manufacturing and services sectors improved simultaneously for the first time post-epidemic, but the improvements were not particularly strong, and one should not be overly optimistic about the employment situation. In the near term, there will still be uncertainties from Covid-19 overseas and the U.S. election, and the development of “dual circulation” in the domestic and international markets will continue to face challenges.”
The seasonally adjusted Japan Services Business Activity Index posted 46.9 in September, up from 45.0 in August. The latest figure signaled a reduction in activity, although one that was the slowest in the current eight-month sequence of contraction.
Shreeya Patel, Economist at IHS Markit:
“Japan continues to be impacted by the COVID-19 outbreak as it recorded another contraction in services business activity during September. Demand across the country remains subdued, with tourism and travel restrictions impeding new work volumes across the service sector. There were some signs of stabilisation, however, with activity falling to the least extent since the pandemic began.”
“Optimism was also evident regarding the year-ahead outlook. Sentiment returned to positive territory amid hopes of rising demand in the next 12 months. Employment, meanwhile, dropped only marginally. Overall, there are signs of improvement in the sector, however recovery is far from secure.”
After accounting for seasonal factors, the IHS Markit/CIPS UK Services PMI Business Activity Index fell from August’s 58.8, which was the strongest reading since April 2015, to a level of 56.1 in September. Although the lowest reading since June, the index nonetheless pointed to a marked rate of growth.
Chris Williamson, Chief Business Economist at IHS Markit:
“The UK service sector showed encouraging resilience in September, with business activity continuing to grow solidly despite the government’s Eat Out to Help Out scheme being withdrawn. Unsurprisingly, spending in the restaurant sector slumped after spiking higher in August, and many other consumer services activities showed a similar slide back into contraction as renewed lockdown measures were introduced, causing the overall rate of expansion to moderate.”
“Optimism about the year ahead has meanwhile cooled somewhat, hinting that risks for coming months lie skewed to the downside. Companies grew increasingly worried about the impact of a second wave of virus infections and the gradual withdrawal of government support, especially the furlough scheme. Brexit worries are also rising again, causing hesitancy in spending and investment decisions. While the third quarter will inevitably see a strong economic rebound, growth in the fourth quarter looks likely to be far less impressive.”
The Political Scene
The Stimulus bill negotiations took many twists and turns during the week, but at the end of the day, there was no agreement.
Perhaps the Institutional Investment firms don’t care whether it’s a Biden or Trump White House. They get stimulus either way. Some suggest they get more stimulus if the Democrats are in control of the purse strings. So other than the two- to three-hour knee-jerk market reactions over the latest headline, all of this is “noise”.
Not much to say on this front. If there is a poll that shows the incumbent is ahead anywhere, I haven’t found it. Mr. Biden enjoys a comfortable lead heading into the final days before the election.
Speaking at the National Association for Business Economics Virtual Annual Meeting, Chair Jerome Powell:
“The recovery has progressed more quickly than generally expected. The expansion is still far from complete. At this early stage, I would argue that the risks of policy intervention are still asymmetric. Too little support would lead to a weak recovery, creating unnecessary hardship for households and businesses. Over time, household insolvencies and business bankruptcies would rise, harming the productive capacity of the economy, and holding back wage growth. By contrast, the risks of overdoing it seem, for now, to be smaller. Even if policy actions ultimately prove to be greater than needed, they will not go to waste. The recovery will be stronger and move faster if monetary policy and fiscal policy continue to work side by side to provide support to the economy until it is clearly out of the woods.”
FOMC minutes weren’t illuminating in terms of the new policy framework or the decision-making at the September 15, 16 meetings, given what analysts have already known. Not surprising there was back and forth on the new Policy Framework. A “range of issues associated with providing greater clarity” on the fund’s rate was discussed. Most supported providing more “explicit outcome-based forward guidance” for the fund’s rate, which included explicit criteria for lifting the rate.
Participants also “noted that outcome-based forward guidance was not an unconditional commitment to a particular path.” A couple of participants wanted an even stronger, less qualified, forward guidance. While there was agreement on the economy’s stronger-than-expected initial bounce, and that about 75% of the lost output has been recovered, the economy was still below pre-pandemic levels. There were uncertainties, however, over the course of spending given the large pool of savings, with some believing it will lead to increased consumption, though others argued that savings may have been built up as well from reduced spending.
Policymakers also said that while consumer prices had increased more quickly than expected, much of it was a function of supply shocks, and prices remained overall low. On fiscal policy, most participants were concerned that fiscal support might not be sufficient, while a couple saw upside risks that relief might be larger than expected, though it would come later.
A trading range under 1% for the 10-year Treasury note has been in place for quite some time. After making a run to the top of that range in June, then testing the lows again, the 10-year bounced off the bottom and closed trading at 0.79%, rising 0.09% for the week.
The 3-month/10-year Treasury curve inverted on May 23rd, 2019, and remained inverted until mid-October. The renewed flight to safety inverted the 3-month/10-year yield curve once again on February 18th, 2020, and that inversion ended on March 3rd. The 2/10 Treasury curve is not inverted today.
Source: U.S. Dept. Of The Treasury
The 2-10 spread was 30 basis points at the start of 2020; it stands at 63 basis points today.
According to AAII;
“Bullish sentiment, expectations that stock prices will rise over the next six months, rose 8.5 percentage points to 34.7%. Optimism was last higher on April 15, 2020 (34.9%). Even with this week’s large increase, bullish sentiment remains below its historical average of 38.0% for the 31st consecutive week and the 36th week this year.”
Crude inventories (excluding SPR) were expected to draw by 1.2 million barrels this week; instead, there was a half a million barrel build. Including strategic reserves, inventories actually drew by 0.64 million barrels. Due to the timing of this week’s data, domestic production figures likely did not pick up any hits to production due to weather. Domestic production rose to the highest level since the end of July at 11 million barrels per day. Refinery throughput also has continued to rise.
Gasoline demand saw a notable uptick, rising to 8.9 million barrels per day, the highest levels since the week of August 21st.
The threat of another hurricane in the Gulf of Mexico offset the somewhat bearish inventory report leaving a closing price of $40.54 for WTI, up by $1.82 on the week.
The Technical Picture
The S&P vacillated above and below key short-term trend lines for five straight days before the index broke up and above near-term resistance.
Chart courtesy of FreeStockCharts.com
That resistance zone should now act as near-term support. The index appears poised to attempt an attack on the September high at 3,580.
No need to guess what may occur; instead it will be important to concentrate on the short-term pivots that are meaningful. However, the Long-Term view, the view from 30,000 feet, is the only way to make successful decisions. These details are available in my daily updates to subscribers.
Short-term views are presented to give market participants a feel for the current situation. It should be noted that strategic investment decisions should NOT be based on any short-term view. These views contain a lot of noise and will lead an investor into whipsaw action that tends to detract from the overall performance.
While the obsession for a viable vaccine for COVID-19 remains in place, a reliable therapeutic will more than likely get the economy back to “normal”. Drugs like Remdesivir and the Regeneron (NASDAQ:REGN) antibody cocktail are just the beginning of what is expected over the next weeks and months.
Individual Stocks and Sectors
“Big Tech” companies like Apple (NASDAQ:AAPL), Facebook (NASDAQ:FB), Google (NASDAQ:GOOG) (NASDAQ:GOOGL), etc. will be another question mark for investors regarding what party is in power after the election. This comes after the House Judiciary Committee published its views on what it views as “monopoly power”. That tone suggests restrictions, fines, and the possible breakup of any or all of these companies could be on the table in the future.
Since it was doubtful the State Attorney Generals that conspired to file suit against “Big tech” was going to be able to prove damages against “free” platforms that anyone can leave at any time, it will now become a legislative issue.
At the end of the day, a breakup would be a windfall for shareholders of these companies. The Judiciary can give me as many shares of “Instagram” along with my Facebook holdings and as much “YouTube”‘ stock in addition to my Google shares as they wish. At the end of the day, this is all about extorting money and will more than likely result in fines.
I do wonder if anyone realizes the benefits all of these companies bring to the table. After all the U.S. would still be in a recession without technology, powered by “big tech”.
Despite these headlines, big tech names were generally higher after the announcement.
So much for the corporate exodus from the social media platforms.
“Q2 Ad-Spending analysis shows major share increases for Facebook, Instagram, Twitter, etc.”
Full Disclosure: Facebook remains a CORE holding in all of my portfolios.
You can pick your October surprise. A wild unmanageable presidential debate, President Trump’s positive COVID test, volatile fiscal relief negotiations that appear terminated until after the election, rising COVID infections in the U.S. and Europe, and we’re only nine days into the month. In a week full of confusion, hope, chagrin, and disappointment, the S&P 500 gained 3.8%.
There remains a contingent that continues to pound the virus narrative. The number of cases, testing, contact tracing, vaccines, the “fall surge”, etc. The obsession over restrictions and continued lockdowns remains elevated. Ironically this perpetually dissatisfied group is focused on how many unemployed are out there and how every restaurant, airline, and cruise ship line is in dire straits. None of the positives ever enter their world.
When they add that up the conclusion is the risk/reward slanted to the downside. It is this viewpoint that kept investors very wary of the stock market since April. That was confirmed every time the “hedgers” arrived on the scene at every instance of market strength. They too find themselves frustrated and perpetually dissatisfied by playing against a trend.
Successful investors realize that they have to manage their portfolio in such a way that they can sleep at night. An investor can begin the transition from being a frustrated investor to a successful one by recognizing the vital importance of keeping the ups and downs within a range that they can stand by having a plan.
Once an investor gains that ability and believes they can avoid losses that are bigger than they can live with, they will stop conjuring up a daily reason to get nervous and jerky about the equity market. That translates to less emotion. Less emotion leads to making solid decisions. Solid decisions yield profits.
The nervous and jerky also tend to be wishy-washy in decision making in their portfolio management. The “hedge” goes on, the “hedge” comes off. Raise cash, put cash to work. The stock market usually devours that type of person as they will sway with the latest headline, popular trend, or any other outside influences. The successful investor employs the two “Cs”. Confidence and Conviction. Confident in your approach with your plan and conviction to see it through no matter how many distractions are presented.
Part of my strategy and present demeanor regarding the markets comes from the confidence that I can manage a downturn, without suffering crippling losses. Techniques that helped navigate the last two meltdowns in 2000 and 2008, along with holding steady during the COVID crisis, are embedded in my planning for any event the market can toss my way.
So an investor can sit around and ponder what will derail the bull market, and make the same mistakes that have been made for years now by the skeptics. The other option is to stay with the trend, watch the data, and the market’s reaction to that data.
The near-term distractions tend to overwhelm many to the point where all perspective is lost. Each has to decide the path they wish to choose. Of course, it’s always prudent to consistently monitor market-moving events. My view of how the market is positioned since April right up to this week is quite different from consensus. I wasn’t a seller because of COVID-19, I was not a buyer because of a “vaccine”. I don’t feel it necessary to be obsessed with the next “stimulus” package, nor do I see a reason to lighten up because of the forecast for a “second wave”. Any equity selling will simply be prudent money management by taking huge profits achieved in a relatively short period of time.
In my view, the two drivers that were responsible for new S&P highs in September are still in place. They now have the Transports at new highs, and the small caps rebounding nicely as the market rally broadens out.
As the opening quote states, there is only one side to the stock market, the right side. Allow me to repeat what I wrote on August 1st: “The Secular Bull ‘Market Of Stocks’ Rolls On”.
Please allow me to take a moment and remind all of the readers of an important issue. I provide investment advice to clients and members of my marketplace service. Each week I strive to provide an investment backdrop that helps investors make their own decisions. In these types of forums, readers bring a host of situations and variables to the table when visiting these articles. Therefore, it is impossible to pinpoint what may be right for each situation.
In different circumstances, I can determine each client’s personal situation/requirements and discuss issues with them when needed. That is impossible with readers of these articles. Therefore I will attempt to help form an opinion without crossing the line into specific advice. Please keep that in mind when forming your investment strategy.
to all of the readers that contribute to this forum to make these articles a better experience for everyone.
Best of Luck to Everyone!
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Disclosure: I am/we are long EVERY STOCK/ETF IN THE SAVYY PLAYBOOK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: My portfolios are ALL positioned to take advantage of the bull market with NO hedges in place.
This article contains my views of the equity market, it reflects the strategy and positioning that is comfortable for me.
IT IS NOT A BUY AND HOLD STRATEGY. Of course, it is not suited for everyone, as each individual situation is unique.
Hopefully, it sparks ideas, adds some common sense to the intricate investing process, and makes investors feel calmer, putting them in control.
The opinions rendered here, are just that – opinions – and along with positions can change at any time.
As always I encourage readers to use common sense when it comes to managing any ideas that I decide to share with the community. Nowhere is it implied that any stock should be bought and put away until you die.
Periodic reviews are mandatory to adjust to changes in the macro backdrop that will take place over time. The goal of this article is to help you with your thought process based on the lessons I have learned over the last 35+ years. Although it would be nice, we can’t expect to capture each and every short-term move.