What’s causing the market’s ups and downs?

Behavioural finance analyst Ken Norquay says now is the perfect time to reduce your exposure to the stock market.

Quite clearly, COVID-19 is not the problem for stock market investors. Since the outbreak late last year, the virus has gotten stronger and stronger. During this time, the stock market went up into The Triple Twenty Top on February 20, 2020. Then it crashed into March 23. Then it regained most of the loss. There’s no correlation between the stock market and the pandemic.

But, we know that something causes the stock market’s ups and downs. What is it? In my stock market book, Beyond the Bull, I present a model to help inventors find the real causes of stock prices, not just the financial media’s sensational cover stories. The model addresses four concepts. The first is obvious: a stock’s price reflects the demand and supply for that stock. Demand is investors’ desire to buy the stock; supply is their collective desire to sell. Buying and selling are actions, but desires are mental phenomena. What factors influence those desires? My Four Sphere Model outlined three influences on supply and demand: (1) intellectual influences—logic, (2) emotional influences—feelings, (3) position influences—your actual investments.

Intellectual and emotional influences

Consider the example of Goliath Pension Fund Management, a big investment management team. The intellectual component affecting their desire to own stocks would include the impact of COVID-19 on corporate earnings, the action of the Fed, the rising tension between the US and China, and how these factors affect their valuation models. Their emotions might be influenced by the breathtaking speed of the first quarter’s market crash, the possibility that the Black Lives Matter movement might trigger an overreaction from the law-and-order crowd, or that the increasingly large swings in the stock market from February 2018 to March 2020 indicate an increase in speculative activity in general.

Goliath’s holdings consist of certain stocks, bonds and bills. Investment managers want large exposure to investments in up trends and lower exposure to investments in down trends. For example, energy stocks have been going down for years and gold mining stocks have been in up trends. They would like to have been over-weighted in gold stocks and under-weighted oil stocks. Federal Reserve Board Chairman Powell’s promise that the Fed would buy “as much as it takes” in long-term treasury bonds influences their portfolios’ exposure to 20-year treasuries.

These three factors cause Goliath’s management team to buy and sell securities for their clients’ portfolios, creating supply or demand in the markets. That’s why stock prices change.
What about you and your portfolio? Your intellect might consider your personal retirement plans, current economic forces and the availability of relevant investment data in today’s “fake news information age”. Your emotions might be nervous and fearful or poised and confident about your economic future. What about your holdings? Do you own lots of investments in up trends and very few in down trends? Should you have more resource stocks and fewer financials? Fewer stocks and more bonds?

Factors Affecting Your Decisions

Your personal investment decision spheres are the same as the big money managers’ three spheres: (1) intellectual factors, (2) emotional factors, (3) holdings. The main difference is that your tiny million-dollar purchases and sales hardly affect the market. Collectively, the big money managers ARE the market. You enter and leave the stock market with no impact: they don’t. In the investment world, you have liquidity; they don’t.

Let us examine our usual financial trends considering these three spheres. Can we determine the real causes of market trend changes?

US and Canadian stock markets

A long-term down trend started with a dramatic “spike top” on February 20/2020, indicating the presence of excess speculation in blue chip American stocks. Speculation gave way to emotional selling in only a few weeks. Beginning March 24, a post-crash rebound regained 95 per cent of the S&P500’s loss and 89.5 per cent of the TSX Composite’s loss.

A normal spike-top pattern would be for the market to stop its ascent any time now and start into the most serious part of the overall decline. Intellectually (1), investors are receiving economic news about the impact of the global pandemic. Emotionally (2), investors seem relieved by the rebound and reassured by central banks’ and governments’ promises to stimulate the economy aggressively. Holdings (3) is the most interesting sphere of our three spheres. Individual investors and consumers are deep in debt, and now, because of the excess stimulation of the US and Canadian economies, both governments have taken on even more debt. Since March 24, the net result of these three factors is strong demand—a short-term up trend.

The long-term trend is down. A normal spike-top pattern is playing out. No surprises so far.

Canadian and US bonds

So far, the high for long-term bonds (the low for long-term interest rates) occurred on March 9, six days before Fed Chairman Powell’s Ides of March promise to print money. March 2020 witnessed a sharp drop and a sharp recovery in 20-year treasury bonds in both Canada and the US. Prices have stabilized and are now at their April Fools’ Day levels.

The long-term trend of bonds is difficult to interpret: a spike top occurred on March 9, but central banks are aggressively supporting the market. For now, we’ll call it a down trend. Intellectually (1), we wonder how governments will finance their recent excessive stimulus programs. Emotionally (2), we fear that printing money leads to hyper inflation and severe economic weakness leads to deflation. Holdings (3), added debt from economic stimulation creates “supply” of new government bonds coming to the market.

Central bank intervention creates demand for bonds. All these cross currents are unprecedented. Because we are small investors, we don’t have the problems of illiquidity that large investors have. We can simply wait for the trend to change and buy or sell based on the new trend. We don’t have to forecast. We can react. The giant investment managers do not have this luxury. The trend is down, but this is a low-confidence interpretation of the data. We’ll react to whatever bond-market trend emerges once the stock market down trend resumes.

US dollar vs. basket of US currencies

The long-term trend has been neutral for over five years, but the post-March, short-term trend is down. In the volatile first quarter of 2020, the US dollar peaked at about 102.5 and dropped to 94.5 in late July.

Canadian dollar vs. US dollar

Statistically, the long-term trend of the Loonie is slightly down. Since the climactic low in oil prices earlier this year, the Loonie has bounced up. Snow-birds who need to convert Canadian dollars to US dollars should do it now to take advantage of the recent bounce in oil and the Loonie, and the recent decline of the US dollar.

Oil prices

A volatile 12-year down trend of oil prices may have ended in a spike bottom in mid-April. The standard post-spike rally is showing signs of weakness now. We expect a decline back toward the low. If that decline holds near the April low, and prices rebound, that would confirm a long-term trend reversal from down to up. We’ll keep you informed.


The trend has been UP since December 2015. In late July, the price of gold surpassed the former all-time high set in September 2011. But, the short-term up trend has “gone parabolic”, indicating excess short-term speculation.


This is a summary of the three spheres that cause market changes.

(1) Intellectual Factors: Information is not reliable. Logic requires accurate data: garbage in, garbage out is the new reality in market analysis.

(2) Emotional Factors: People are fearful about the pandemic. The fear is spilling over into the Black Lives Matter movement. US President Donald Trump has countered with special forces riot police. A US election is only a few months away. The emotional level of the investment community is high.

(3) Holdings: Based on this analysis, now is the perfect time to reduce our exposure to the stock market. For now, we should hold our normal allocation in bonds and slightly increase our exposure to US investments vs. Canadian. We should have our normal weight of oil and energy investments and greater-than-normal exposure to gold and precious metals.

These are the three factors that influence your investment decisions. And, the fourth factor, your decision, as always, is to buy something, sell something, or do nothing.

Ken Norquay, CMT (Chartered Market Technician), is the author of the book Beyond the Bull, which discusses the impact of your personality on your long-term investments: behavioural finance.

This is an edited version of an article that was originally published for subscribers in the September 2020/First Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.

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