Tag Archives: technical analysis

Major Market Buy/Sell Review: 04-27-20

HOW TO READ THE CHARTS

There are three primary components to each chart:

  • The price chart is in orange
  • The Over Bought/Over Sold indicator is in gray
  • The Buy / Sell indicator is in blue.

When the gray indicator is at the TOP of the chart, there is typically more risk and less reward available at the current time. In other words, the best time to BUY is when the short-term condition is over-sold. Likewise when the buy/sell indicator is above the ZERO line investments have a tendency of working better than when below the zero line.

With this basic tutorial let’s review the major markets.

NOTE: I have added relative performance information to each graph. Most every graph shows relative performance to the S&P 500 index except for the S&P 500 itself which compares value to growth, and oil to the energy sector. 

S&P 500 Index

  • Last week I wrote: “The break of the 50% retracement this past week, is bullish and suggests a run to the 200-dma is likely. However, the risk/reward is not in the favor of longer-term positions, so trading positions only for now.” 
  • This past week, SPY retested, and held above, the 50% retracement keeping a run to the 61.8% retracement still viable. However, the market does appear to be struggling and is overbought short-term. 
  • This analysis still doesn’t negate the risk of more volatility ahead, so be prepared for sharp declines which means keeping trading stops tight.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No core position
    • This Week: Trading “Rentals” Only 
    • Stop-loss moved up to $265
    • Long-Term Positioning: Bearish

Dow Jones Industrial Average

  • DIA is a little different story as it failed at the 50% retracement and closed below it.
  • Also, on a relative basis, SPY continues to smartly outperform DIA. 
  • If DIA fails to gain traction next week, we will likely see a failure of support. Trading “rentals” only for now with a tight stop at $226
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No positions
    • This Week: Trading “Rentals” Only
    • Stop-loss moved up to $226
  • Long-Term Positioning: Bearish

Nasdaq Composite

  • As we have noted previously, QQQ is by far “the best index” to own currently from a technical basis. 
  • QQQ is outperforming the SPY by a wide margin, but not surprising given the top-5 stocks in the SPY are also the top-5 in the QQQ and are most technology related shares. 
  • Last week’s break above the 200-dma and the 61.8% sets up a test of “all-time” highs. (Pretty incredible when you think about the amount of economic devastation that is coming.)
  • But, from a trading perspective, “What is…is.”
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No positions
    • This Week: Trading “Rentals” Only
    • Stop-loss moved up to $200
  • Long-Term Positioning: Bearish due to valuations

S&P 600 Index (Small-Cap)

  • Small caps continue to sorely underperform large caps in the current environment which also suggests the broader market remains at risk as well. 
  • No change to our positioning on Small-caps which are still “no place to be as both small and mid-cap companies are going to be hardest hit by the virus.”
  • Be careful what you own. 
  • Avoid small-caps. 
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No positions
    • This Week: No positions.
    • Stop loss adjusted to $44 on trading positions.
  • Long-Term Positioning: Bearish

S&P 400 Index (Mid-Cap)

  • As with Small-caps, we have no holdings. 
  • Relative performance continues to remain exceedingly poor. MDY failed at the 28.2% retracement level and is at risk of a much slower economic environment.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No holding
    • This Week: No holding
    • Stop Loss moved up to $245 for trading positions. 
  • Long-Term Positioning: Bearish

Emerging Markets

  • As with small and mid-cap stocks, emerging and international markets are being hit hard by the virus. Economically, these countries are being destroyed right now. 
  • We previously stated that investors should use counter-trend rallies to sell into. If you haven’t done so, do so Monday. Relative performance remains exceedingly weak. 
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No position
    • This Week: No position.
    • Stop-loss moved up to $33 for trading positions.
  • Long-Term Positioning: Bearish

International Markets

  • Same with EFA as with EEM. 
  • The rally failed at the 28.2% retracement and relative performance remains exceedingly weak. 
  • Remain out of these markets for the time being.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No position.
    • This Week: No position.
    • Stop-loss moved up to $51 for trading positions.
  • Long-Term Positioning: Bearish

West Texas Intermediate Crude (Oil)

  • This past week, saw oil prices collapse and then rally back as futures contracts rolled from May to June. That’s the good news, the bad news is that oil prices are going to go lower again as we head into May and storage remains a problem. 
  • We continue to suggest using any rally to clear positions in your portfolio for now.
  • We have not changed out stance on the sector from a “value” perspective, however, and this past week we nibbled into XOM, CVX, and XLE as oil stocks had exceedingly strong relative performance relative to oil. This suggests most of the risk has been pulled out of the sector. We are still carrying very tight stops though. 
  • Short-Term Positioning: Bearish
    • Last Week: No positions
    • This Week: XOM, CVX, and XLE
    • Stops Triggered for any direct crude oil positions.
  • Long-Term Positioning: Bearish

Gold

  • We previously added to our positions in IAU and GDX. 
  • This past week Gold broke out to new highs as inflationary concerns continue to persist. 
  • The sectors are VERY overbought short-term so a pullback is likely that can be used to add to current holdings. 
  • Short-Term Positioning: Bullish
    • Last week: Hold positions.
    • This week: Hold positions – Positions can now be added at 157.50
    • Stop-loss moved up to $150
    • Long-Term Positioning: Bullish

Bonds (Inverse Of Interest Rates)

  • Bonds are back to “crazy” overbought with the Fed buying everything from the banks who are happy to mark-up prices and sell it to them. 
  • As we have been adding equity exposure to portfolios, we needed to increase our “hedge” against equity risk accordingly.  We added a 5% position of TLT on Friday for just this reason. 
  • Short-Term Positioning: Neutral
    • Last Week: Hold positions
    • This Week: Added 5% position of TLT
    • Stop-loss is $152.50
    • Long-Term Positioning: Bullish

U.S. Dollar

Major Market Buy/Sell Review: 04-20-20

HOW TO READ THE CHARTS

There are three primary components to each chart:

  • The price chart is in orange
  • The Over Bought/Over Sold indicator is in gray
  • The Buy / Sell indicator is in blue.

When the gray indicator is at the TOP of the chart, there is typically more risk and less reward available at the current time. In other words, the best time to BUY is when the short-term condition is over-sold. Likewise when the buy/sell indicator is above the ZERO line investments have a tendency of working better than when below the zero line.

With this basic tutorial let’s review the major markets.

S&P 500 Index

  • Last week I wrote: “This past week, the market was able to muster a rally to the 50% retracement level, and on many short-term fronts is extremely overbought. While a retest, and potential break of the March lows is likely, the market does have some lift short-term.”
  • The break of the 50% retracement this past week, is bullish and suggests a run to the 200-dma is likely. However, the risk/reward is not in the favor of longer-term positions, so trading positions only for now. 
  • This still doesn’t negative the risk of more volatility ahead, so be prepared for quick declines, so keep trading stops tight.
  • Remain cautious for now.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No core position
    • This Week: Trading “Rentals” Only 
    • Stop-loss moved up to $278
    • Long-Term Positioning: Bearish

Dow Jones Industrial Average

  • The same situation exists with DIA. 
  • The break of the 50% retracement sets up a run to the 200-dma. 
  • Trading “rentals” only for now with a tight stop at $238
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No positions
    • This Week: Trading “Rentals” Only
    • Stop-loss moved up to $238
  • Long-Term Positioning: Bearish

Nasdaq Composite

  • As we have noted previously, QQQ is by far “the best index in town,” technically speaking.
  • Last week’s break above the 200-dma and the 61.8% sets up a test of “all-time” highs. (Pretty incredible when you think about the amount of economic devastation that is coming.)
  • But, from a trading perspective, “What is…is.”
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No positions
    • This Week: Trading “Rentals” Only
    • Stop-loss moved up to $200
  • Long-Term Positioning: Bearish due to valuations

S&P 600 Index (Small-Cap)

  • No change to our positioning on Small-caps which are still “no place to be as both small and mid-cap companies are going to be hardest hit by the virus.”
  • Be careful what you own. 
  • Avoid small-caps. Use last week’s rally to clear positions for now.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No positions
    • This Week: No positions.
    • Stop loss adjusted to $44 on trading positions.
  • Long-Term Positioning: Bearish

S&P 400 Index (Mid-Cap)

  • As with Small-cap, we have no holdings. Use last week’s rally to sell positions.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No holding
    • This Week: No holding
    • Stop Loss moved up to $245 for trading positions. 
  • Long-Term Positioning: Bearish

Emerging Markets

  • As with small and mid-cap stocks, emerging and international markets are being hit hard by the virus. Economically, these countries are being destroyed right now. 
  • We previously stated that investors should use counter-trend rallies to sell into. If you haven’t done so, use last week’s rally to clear positions.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No position
    • This Week: No position.
    • Stop-loss moved up to $33 for trading positions.
  • Long-Term Positioning: Bearish

International Markets

  • As noted previously: “A reflexive rally is likely. Use those levels to sell into.”
  • Use last week’s rally to sell holdings. 
  • Remain out of these markets for the time being.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No position.
    • This Week: No position.
    • Stop-loss moved up to $51 for trading positions.
  • Long-Term Positioning: Bearish

West Texas Intermediate Crude (Oil)

  • The “spike” in oil prices on Friday was due to the change in oil futures contracts from May to June. Oil actually declined on Friday with the May contract at $17/bbl. 
  • Regardless, $25 is the price for June delivery of oil. Without any help on the horizon, look for the June contract to head back towards $20/bbl. 
  • We continue to suggests using any rally to clear positions in your portfolio for now.
  • We have not changed out stance on the sector from a “value” perspective, however, the sector still has work to do, so be patient. 
  • Avoid for now.
  • Short-Term Positioning: Bearish
    • Last Week: No positions
    • This Week: No positions.
    • Stops Triggered for any direct crude oil positions.
  • Long-Term Positioning: Bearish

Gold

  • We previously added to our positions in IAU and GDX.
  • The sectors are VERY overbought short-term so a pullback is likely that can be used to add to current holdings. 
  • Short-Term Positioning: Bullish
    • Last week: Hold positions.
    • This week: Hold positions – Look at add if support holds at $150
    • Stop-loss moved up to $147.50
    • Long-Term Positioning: Bullish

Bonds (Inverse Of Interest Rates)

  • Bonds are back to “crazy” overbought with the Fed buying everything from the banks who are happy to mark-up prices and sell it to them. 
  • Bond prices will correct and provide a better entry point to add exposure. So, be patient for now. Short-Term Positioning: Neutral
    • Last Week: Hold positions
    • This Week: Take Profits and rebalance holdings as needed.
    • Stop-loss is $147.50
    • Long-Term Positioning: Bullish

U.S. Dollar

Major Market Buy/Sell Review: 04-13-20

HOW TO READ THE CHARTS

There are three primary components to each chart:

  • The price chart is in orange
  • The Over Bought/Over Sold indicator is in gray
  • The Buy / Sell indicator is in blue.

When the gray indicator is at the TOP of the chart, there is typically more risk and less reward available at the current time. In other words, the best time to BUY is when the short-term condition is over-sold. Likewise when the buy/sell indicator is above the ZERO line investments have a tendency of working better than when below the zero line.

With this basic tutorial let’s review the major markets.

S&P 500 Index

  • Previously we wrote: “Well, that bounce finally came and it was as vicious as we expected. While this remains a “bear market” rally, the media was quick to jump on the “Bear market is over” bandwagon. It isn’t, and investors will likely pay a dear price in April.”
  • This past week, the market was able to muster a rally to the 50% retracement level, and on many short-term fronts is extremely overbought. While a retest, and potential break of the March lows is likely, the market does have some lift short-term.
  • Despite the Fed flooding money into the system, we could be set up for some very volatile moves as the economic data is about to become horrific, and earnings estimates will be revised sharply lower. 
  • Remain cautious for now. 
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No core position
    • This Week: No core position
    • Stop-loss moved up to $245
    • Long-Term Positioning: Bearish

Dow Jones Industrial Average

  • The same situation exists with DIA.
  • The bounce we discussed previously retraced to the 50% retracement level. We could see some positive action on Monday, but we remain firmly entrenched in a bear market for now. 
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No positions
    • This Week: No positions.
    • Stop-loss moved up to $210
  • Long-Term Positioning: Bearish

Nasdaq Composite

  • We had previously put on a small QQQ trade for a reflexive rally, but we closed that out. 
  • As with SPY and DIA, the QQQ has established a downtrend, but technically is in MUCH better shape than the other markets with the bull-trend still intact.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No positions
    • This Week: No positions
    • Stop-loss moved up to $180
  • Long-Term Positioning: Bearish due to valuations

S&P 600 Index (Small-Cap)

  • Small-caps are no place to be as both small and mid-cap companies are going to be hardest hit by the virus.
  • Be careful what you own, there are going to be quite a few companies that don’t make it. 
  • Avoid small-caps. Use last week’s rally to clear positions for now.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No positions
    • This Week: No positions.
    • Stop loss adjusted to $44 on trading positions.
  • Long-Term Positioning: Bearish

S&P 400 Index (Mid-Cap)

  • As with Small-cap, we have no holdings. Use last week’s rally to sell positions.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No holding
    • This Week: No holding
    • Stop Loss moved up to $245 for trading positions. 
  • Long-Term Positioning: Bearish

Emerging Markets

  • As with small and mid-cap stocks, emerging and international markets are being hit hard by the virus. Economically, these countries are being destroyed right now. 
  • We previously stated that investors should use counter-trend rallies to sell into. If you haven’t done so, use last week’s rally to clear positions.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No position
    • This Week: No position.
    • Stop-loss moved up to $33 for trading positions.
  • Long-Term Positioning: Bearish

International Markets

  • As noted previously: “‘A reflexive rally is likely. Use those levels to sell into.”
  • Use last week’s rally to sell holdings. 
  • Remain out of these markets for the time being.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No position.
    • This Week: No position.
    • Stop-loss moved up to $51 for trading positions.
  • Long-Term Positioning: Bearish

West Texas Intermediate Crude (Oil)

  • As stated last week, “Saudi and Russia are NOT likely going to cut production meaningfully as they now have shale drillers in a stranglehold. They are going to talk a lot, but they aren’t going to do anything until they extinguish shale to some degree. For the last couple of years, I have warned this outcome would eventually occur.”
  • Shockingly they did come to an agreement, but it may be too little ,too late and whose to say that member OPEC countries adhere to their commitments.
  • We also stated to use the rally last week to clear positions in your portfolio for now stating:
    • “We will very likely retest or set new lows in the coming months as drillers are forced to “shut in” production. At that point we can start picking through the ruble for portfolio positioning.” 
  • We still like the sector from a “value” perspective and expect that we will wind up making a lot of money here. We clearly aren’t at lows yet, so be patient. 
  • Avoid for now.
  • Short-Term Positioning: Bearish
    • Last Week: No positions
    • This Week: No positions.
    • Stops Triggered for any direct crude oil positions.
  • Long-Term Positioning: Bearish

Gold

  • We added to our positions in IAU and GDX last week as the Fed’s action are starting to raise the specter of rather serious inflation problems. 
  • Last week, Gold broke out to highs and brought the “buy signal” back online. 
  • Gold is a little overbought short-term so use pullbacks to support to add further holdings.
  • Short-Term Positioning: Bullish
    • Last week: Hold positions.
    • This week: Hold positions.
    • Stop-loss moved up to $142.50
    • Long-Term Positioning: Bullish

Bonds (Inverse Of Interest Rates)

  • We have reduced our overall bond exposure, because we are running a very reduced equity exposure currently. This aligns our “hedge” of fixed income relative to our equity book. 
  • However, bonds are now MORE overbought that at just about any other point in history which suggests we could see a tick up in rates and a fall in bond prices. (Such will provide a good opportunity to add bond exposure to portfolios.)
  • Normally, such a reversion would coincide with a “risk on” trade into equities. However, given the economic devastation coming, we need to look back at 2008. In November of 2008, the Fed hit the markets with QE which caused bonds and stocks to rise in unison. However, shortly thereafter, both declined sharply in price as economic realities came to the fore.

  • Short-Term Positioning: Neutral
    • Last Week: Hold positions
    • This Week: Take Profits and rebalance holdings as needed.
    • Stop-loss is $147.50
    • Long-Term Positioning: Bullish

U.S. Dollar

  • The dollar fell sharply as we had a reflexive “bear market” rally. However, with concerns over the deteriorating global economy and the demand for dollars from abroad, money is flowing back into the dollar for safety. 
  • The recent volatility of the dollar makes it hard to trade for now, so be patient for the moment and let things calm down. We may look to add a long-dollar trade on a pull back to the $98-99 areas. 
  • The dollar is on a strong “buy signal” and is NOT “overbought,” which suggests dollar strength may be with us for a while longer.

Michael Markowski: Stock Market Relief Rally High Extended

Michael Markowski has been involved in the Capital Markets since 1977. He spent the first 15 years of his career in the Financial Services Industry as a Stockbroker, Portfolio Manager, Venture Capitalist, Investment Banker and Analyst. Since 1996 Markowski has been involved in the Financial Information Industry and has produced research, information and products that have been used by investors to increase their performance and reduce their risk. Read more at BullsNBears.com


The date range for the SCPA’s forecasted relief rally highs for stock markets of the US, Japan, Germany, France, South Korea, and Canada to occur has been adjusted. Based on the adjustment the SCPA’s new 100% statistical probability is that the relief rally highs from the March 2020 lows have been reached or will be reached by April 14, 2020.  Prior to the adjustment, the probability was 100% that relief rally high had been reached on or prior to Friday, April 3, 2020.

The adjustments were required when it was discovered that the empirical data for the Dow Jones Industrial’s index included Saturday trading sessions. From 1871 to 1952 the US market was open for trading on Saturdays. The inclusion of the Saturdays’ data distorted the SCPA’s date-of-event-to-occur forecasts since they increased the empirical data points for the researched periods by 20%. 

All of the event forecast dates by the SCPA (Statistical Crash Probability Analysis) which have been published are in the process of being revised. The only exception is that the final bottom for the Crash of 2020 will occur in Q4 2022 with a decline of 79% to 89% below 2020 highs. None of the previously published interim lows, highs, and final bottom percentages or price targets have changed.

As of Friday, April 3, 2020, all eight of the indices of the six countries had increased by a minimum of 18% from their March 2020 lows.  The SCPA had forecasted on March 24th that the probability for each of the eight indices to increase by 18% was 100% and that the probability of a 23% increase was 50%.  As of today’s April 6, 2020, close the Dow Jones Industrials composite became the first index to reach the 23% threshold with a gain of 24.5%.

My prediction is that the S&P 500’s secular bull market which began in March 2009 ended on February 19, 2020.  The ninth secular bear since 1802 began on February 20th.   Based on the peaks of the last three secular bull markets as compared to the troughs of the three most recent secular bears, the S&P 500 could decline by an additional 47% to 80% from its March 6, 2020 close.

Read my March 31, 2020, article entitled “Embrace the Bear” to learn about:

  • investing strategies that are best utilized during bear markets
  • investing in ETFs which go up when the market goes down
  • algorithms including the Bull & Bear Tracker and SCPA ’s which are being utilized by investors

Major Market Buy/Sell Review: 04-06-20

HOW TO READ THE CHARTS

There are three primary components to each chart:

  • The price chart is in orange
  • The Over Bought/Over Sold indicator is in gray
  • The Buy / Sell indicator is in blue.

When the gray indicator is at the TOP of the chart, there is typically more risk and less reward available at the current time. In other words, the best time to BUY is when the short-term condition is over-sold. Likewise when the buy/sell indicator is above the ZERO line investments have a tendency of working better than when below the zero line.

With this basic tutorial let’s review the major markets.

S&P 500 Index

  • Last week: “Well, that bounce finally came and it was as vicious as we expected. While this remains a “bear market” rally, the media was quick to jump on the “Bear market is over” bandwagon. It isn’t, and investors will likely pay a dear price in April.”
  • After running into the bullish trend line and the initial 38.2% retracement, the market failed and has established a downtrend. A retest, and potential break of the March lows is likely, but we will monitor this carefully. With the Fed flooding money into the system, we could be set up for some very volatile moves, but the economic data is about to become horrific and earnings estimates will be revised sharply lower. 
  • Remain cautious for now. 
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No position
    • This Week: No position
    • Stop-loss set at $220
    • Long-Term Positioning: Bearish

Dow Jones Industrial Average

  • The same situation exists with DIA.
  • The bounce we discussed previously retraced to the 38.2% retracement level and failed. We could see some positive action on Monday, but we remain firmly entrenched in a bear market for now. 
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No positions
    • This Week: No positions.
    • Stop-loss set at $185
  • Long-Term Positioning: Bearish

Nasdaq Composite

  • We had previously put on a small QQQ trade for a reflexive rally, but we closed that out. 
  • As with SPY and DIA, the QQQ has established a downtrend, but technically is in MUCH better shape than the other markets with the bull-trend still intact.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No positions
    • This Week: No positions
    • Stop-loss set at $170
  • Long-Term Positioning: Bearish due to valuations

S&P 600 Index (Small-Cap)

  • Small-caps have a lot more downside to go as both small and mid-cap companies are going to be hardest hit by the virus.
  • Be careful what you own, there are going to be quite a few companies that don’t make it. 
  • Avoid small-caps. Use any reflexive rally to step-aside for the time being.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No positions
    • This Week: No positions.
    • Stop loss adjusted to $42 on trading positions.
  • Long-Term Positioning: Bearish

S&P 400 Index (Mid-Cap)

  • As with Small-cap, we have no holdings. 
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No holding
    • This Week: No holding
  • Long-Term Positioning: Bearish

Emerging Markets

  • As with small and mid-cap stocks, emerging and international markets are being hit hard by the virus. Economically, these countries are being destroyed right now. 
  • We previously stated that investors should use counter-trend rallies to sell into. If you haven’t done so, use any rally to clear positions.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No position
    • This Week: No position.
    • Stop-loss set at $30 for trading positions.
  • Long-Term Positioning: Bearish

International Markets

  • As noted last week: “‘A reflexive rally is likely. Use those levels to sell into. Do so this week.”
  • Remain out of these markets for the time being.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No position.
    • This Week: No position.
    • Stop-loss set at $46 for trading positions.
  • Long-Term Positioning: Bearish

West Texas Intermediate Crude (Oil)

  • Last week, the President said he talked to Saudi Arabia and they were in talks with Russia to cut $10 million barrels of production. That tweet sparked a vicious rally in oil keeping prices above the critical level of $20.
  • Saudi and Russia are NOT likely going to cut production meaningfully as they now have shale drillers in a stranglehold. They are going to talk a lot, but they aren’t going to do anything until they extinguish shale to some degree. For the last couple of years, I have warned this outcome would eventually occur. 
  • Use this rally in oil to clear positions in your portfolio for now. We will very likely retest or set new lows in the coming months as drillers are forced to “shut in” production. At that point we can start picking through the ruble for portfolio positioning. 
  • We still like the sector from a “value” perspective and expect that we will wind up making a lot of money here. We clearly aren’t at lows yet, so be patient. 
  • Avoid for now.
  • Short-Term Positioning: Bearish
    • Last Week: No positions
    • This Week: No positions.
    • Stops Triggered for any direct crude oil positions.
  • Long-Term Positioning: Bearish

Gold

  • We previously added to our position in IAU and continue to have a small holding in GDX, as the previous liquidation left a lot of value in the sector. However, performance remains lazy at this point, so we are looking for pullbacks to support to add to our holdings. 
  • Short-Term Positioning: Bullish
    • Last week: Hold positions.
    • This week: Hold positions.
    • Stop-loss set at $137.50.
    • Long-Term Positioning: Bullish

Bonds (Inverse Of Interest Rates)

  • We have reduced our overall bond exposure, because we are running a very reduced equity exposure currently. This aligns our “hedge” of fixed income relative to our equity book. 
  • We remain very cautious on our bond exposure currently, and will look to add to that exposure once the credit markets calm down a bit. 
  • Short-Term Positioning: Neutral
    • Last Week: Hold positions
    • This Week: Hold positions
    • Stop-loss is moved up to $147.50
    • Long-Term Positioning: Bullish

U.S. Dollar

  • The dollar fell sharply as we had a reflexive “bear market” rally. However, with concerns over global economic strength rising, money is flowing back into the dollar for safety. 
  • The recent volatility of the dollar makes it hard to trade for now, so be patient for the moment and let things calm down. We can look to add a long-dollar trade on a pull back to the $98-99 areas. 
  • The dollar has reversed its sell signal, which suggests dollar strength may be with us for a while longer.

Michael Markowski: Markets Now At Tipping Point, Ride Will Be Epic.

 Michael Markowski has been involved in the Capital Markets since 1977. He spent the first 15 years of his career in the Financial Services Industry as a Stockbroker, Portfolio Manager, Venture Capitalist, Investment Banker and Analyst. Since 1996 Markowski has been involved in the Financial Information Industry and has produced research, information and products that have been used by investors to increase their performance and reduce their risk. Read more at BullsNBears.com


The market indices of the US, Japan, South Korea, Canada, France and Germany and the share prices for many of the world’s largest companies including Apple and Microsoft are at the tipping point.  Stocks and indices reached their post-crash and relief rally closing highs from March 25th through March 27th.

None of the indices for the six countries has since closed above their highs.  Since making their relief rally highs all eight of the indices have declined by 4.2% to 7.4%.

With each new passing day that the indices are unable to get new post-crash highs, the probability increases that they will careen back to and through their March 2020 lows.

Investors now need to make a decision; stay in the roller coaster or get out?

From my empirical research on the prior notable market crashes in early March 2020, I discovered that the 1929 crash and the bursting of the NASDAQ dotcom bubble in 2000 share the same genealogy as the crashes of the markets of the six countries which have been underway.  The discovery was significant. It enabled the events chronology throughout the lives of the 1929 and 2000 crashes to be utilized to forecast the events for the crashes of six countries which are now underway and future crashes. For more about the genealogy read 03/23/20 “Probability 87% that market is at interim bottom” article.

The table below contains the first four precisely accurate forecasts that were made from the statistical crash probability analysis’ (SCPA).  The SCPA was developed from the findings from my empirical research of the most notable market crashes since 1929.

The charts below depict the almost identical chronology for the post-crash events that occurred after the Dow Jones crashed in 1929 and the NASDAQ dotcom bubble burst in 2000.  The journey to the final bottom took the Dow 32 months and the NASDAQ 31 months. The NASDAQ declined by 78% and the Dow by 89% from their highs.

The “2020”, year to date charts of the US’ Dow Jones, S&P 500 and NASDAQ indices below depict their crash chronologies from February 20th through March 27th.  Again, the chronologies of the 2020 crashes and the 1929 Dow and 2000 NASDAQ crashes though their initial correction and relief rally periods are very similar.

It was no surprise that the chart patterns for Microsoft and Apple mimic the three US indices.  The two companies are the largest members of all three. Since they have significant index weightings, wherever the indices go, they will follow.

The above charts and tables provide the rationale as to why the eight indices of the six countries will soon begin their marches to the following in sequence:

  • new lows 
  • interim bottoms 
  • interim highs 
  • final bottoms in Q4 2022 with declines ranging from 78% to 89% below 2020 highs

According the Statistical Crash Probability Analysis’ (SCPA) forecasts the probability is 100% that:

  • The relief rally highs for markets of the six countries have either already occurred or will occur by Friday, April 3, 2020.  
  • The eight indices will reach new 2020 lows by April 30, 2020.

To be clear.  Those who are still invested in stocks, mutual funds, and ETFs need to give serious consideration as to whether or not they want to stay on the wild roller coaster.  The ride will take everyone to the interim bottoms which will be within 41% to 44% of the eight indices’ 2020 highs.

After reaching the bottom the indices will then ricochet back to and through the recent relief rally highs and to the post-crash highs according to the SCPA’s forecast.  What will likely power the heart-pounding ride to the top is news about a cure or vaccine for the Coronavirus. This is will enable those who choose to stay on the rollercoaster to be able to liquidate at higher prices.  After the post-crash high has occurred the SCPA’s probability is 100% that the indices will then reverse to begin their descents to the final bottom which will 79% below their 2020 highs. The probability is 50% for the bottom to be within 89%

The virus did not cause the crash.   It caused the correction for markets which were ripe for an epic market crash.  Therefore, the probability is extremely low that good news about the virus will be enough to drive the markets back to new all-time highs.  See my March 5, 2020 article “Overvalued stocks, freefalling US Dollar to soon cause epic market crash!”.

The SCPA is also forecasting a 100% probability for the key on the horizon events of the crash of 2020 below to occur in the sequence below.  The events and their probabilities are applicable to the eight indices of the six countries and for their largest members including Microsoft and Apple, etc.

  • Interim bottom by or before May 4, 2020
  • At interim bottom market will be 41% to 44% below 2020 highs
  • Post-crash high before the journey begins to final Q 4 2022 bottom will occur by as early as June 24, 2020 and by as late as September 18, 2020.
  • Post-crash highs to get market to within 17% of 2020 highs.

My only argument with the SCPA’s statistical probability analyses is can the markets get back to above or even to their March/April 2020 post-crash relief rally highs?  The simultaneous crashes in multiple markets for more than one country, let alone six countries, is historically unprecedented.

My hunch is that the damage to the markets and economies of the world’s leading developed countries will be much more severe than the damage caused by the 1929 crash.  The relief rally highs could prove to be the post-crash highs.

Should the recent highs be the post-crash highs, according to the SCPA the probability is 100% that it will take the markets a minimum of 15 years to get back above the highs reached during the week ended March 27, 2020.  Additionally, the findings from my extensive research on all of the secular bear markets since 1929 further support the SCPA’s forecast.

In addition to my empirical research of notable crashes, I also have been conducting empirical research on the Dow’s biggest one day gains from 1901 to 2020.  Based on my findings the probability is 94.4% that the Dow’s media sensationalized gains for the week ended March 27, 2020 were bear market rallies. See, “The TRUTH about Dow’s ‘… one day jump since 1933”.

Everyone should take advantage of markets being in close proximity of their post correction highs to exit the markets.  All mutual funds and stocks over $5.00 per share should be liquidated. I will provide my rationale for holding and also for buying low priced and penny shares in a future article.  My suggestion is to utilize a methodical approach by liquidating 20% of all holdings per day from April 1st to April 8th.

There are only three reasons why anyone would want to hold on to their stocks and mutual funds:

  1. Waiting to get back to break even.  It’s against human nature to take losses.  I knew investors in the 1970s who had been waiting for 10 to 20 years for a blue chip to get back to their purchase price.  Bite the bullet.
  2. Not wanting to pay capital gains.  Securities with gains can be “sold short against the box” to delay a taxable capital gain.   Capital gains taxes will only go up from here.
  3. Financial advisor advising otherwise.  Beware of the following:

a) An advisor’s largest percentage fee that can be charged is for the amount that an investor has in stocks.  If the investor is in cash the advisor can-not charge the fee.

b) The majority of financial advisors are affiliated with big brand name firms including Merrill Lynch, Morgan Stanley, Goldman Sachs and UBS, etc.  These advisors have to follow the party line. They do not have the independence to get their clients out of the market even if they wanted to.

c) The financial services industry utilizes propaganda to keep clients in the market during volatile periods.  Read “No One Saw It Coming’ – Should You Worry About The 10-Best Days” by Lance Roberts. He is among a few of the independent advisors who I know which had his clients’ 90% out of the market.

S&P 500 Monthly Valuation & Analysis Review – 4-01-2020

J. Brett Freeze, CFA, founder of Global Technical Analysis. Each month Brett will provide you their valuable S&P 500 Valuation Chart Book. This unique analysis provides an invaluable long term perspective of equity valuations. If you are interested in learning more about their services, please connect with them.


Michael Markowski: Embrace The Bear – Next Leg Down Is Coming

 Michael Markowski has been involved in the Capital Markets since 1977. He spent the first 15 years of his career in the Financial Services Industry as a Stockbroker, Portfolio Manager, Venture Capitalist, Investment Banker and Analyst. Since 1996 Markowski has been involved in the Financial Information Industry and has produced research, information and products that have been used by investors to increase their performance and reduce their risk. Read more at BullsNBears.com


Investors must embrace the bear. A savvy investor or advisor can generate significantly more profits from a secular bear, than a secular bull.  It’s also much easier to predict the behavior of a wild and vicious bear than a domesticated bull.

The new 2020 secular bear is the first for which an investor can utilize an inverse ETF (Exchange Traded Fund) to invest in a bear market from start to finish. The share price of an inverse ETF increases when a market goes down. The first inverse ETFs were invented in 2007. The new ETFs enabled investors to make significant profits at the end of the 2000 to 2009 secular bear market.  The chart below depicts the gains for the Dow’s inverse ETF before and after Lehman went bankrupt in 2008.

The increased volatility caused by the secular bear can be leveraged by algorithms which had not been utilized in prior bear markets.   Two of my algorithms have the potential to produce substantial gains:

  • Bull & Bear Tracker (BBT) 

From April 9, 2018, and through February 29, 2020, the Bull & Bear Tracker (BBT) trend trading algorithm which trades both long and inverse ETFs produced a gain of 77.3% vs. the S&P 500’s 14.9%.   March of 2020 will be the BBT’s 9th consecutive profitable month.

The Bull & Bear Tracker thrives on market volatility.  The algorithm’s best performance days since the inception of the signals have been when the markets are most volatile.

  • SCPA (Statistical Crash Probability Analysis)

The SCPA is a crash event forecasting algorithm. The algorithm has been very accurate at forecasting the crash of 2020’s events.  The SCPA’s forecast that the market had reached a bottom on March 23rd was precisely accurate.   From 03/23/20 to 0/3/26/20, the Dow had its biggest one-day gain (11.4%) and three-day percentage gain (21.3%) since 1929 and 1931, respectively.  Those investors who purchased the Dow’s long ETF (symbol: DIA) by close of the market on March 23, 2020, after reading “Probability is 87% that market is at interim bottom”  which was published during market hours, had a one day gain of 11% at the close of the market on March 24, 2020.

The SCPA’s future event forecasts throughout the life of the crash of 2020 are being utilized to trade long and inverse ETFs until the US markets reach their final bottoms in the fourth quarter of 2022.  Had the SCPA and inverse ETFs been available to trade the SCPA’s forecasts in 1929, savvy investors would have made more than 572% from December of 1929 through July of 1932. There were 14 Bear market rallies with average gains of 17%.  The rallies were followed by 14 declines which averaged 23%. could have produced average gains of 23% for inverse ETF investors.

Both the Bull & Bear Tracker (BBT) and SCPA complement each other. The BBT predicts market volatility before it increases. The SCPA forecasts the percentage increases for the bear market rallies and the percentage declines from the bear rally highs. My prediction is that the utilization of both of the algorithms will reduce the failed signals ratio for the Bull & Bear Tracker.

Based on the findings from my recently completed empirical research of the Dow’s best rallies from 1901 to 2020, the markets will remain extremely volatile for the foreseeable future.

The Truth About The Biggest One Day Jump Since 1933

The Wall Street Journal’s “Dow Soars More Than 11% in Biggest One-Day Jump Since 1933” was inaccurate.  It should have read since “1929”.  The article should have been about the Dow Jones industrials composite index having its best one day and three-day percentage gains since 1929 and 1931 respectively.

The gain of 21.3% for the Dow’s three-day rally that ended on March 26th was the index’s second best since 1901.  The one-day gain of 11.4% on March 24th ranks as the Dow’s fourth best day since 1901.  To understand the significance of the error read on.

Nine of the top ten three-day percentage gainers occurred during the first four years of the 1929 to 1949 secular bear market.  The Five rallies which occurred before the 1929 crash reached its final bottom on July 8, 1932 all failed. Their post rally declines ranged from 19% to 82%.

Six of the 10 biggest daily percentage increases in the table below for the Dow over the last 120 years occurred from 1929 to 1933.  There were two 2008 secular bear market rallies, October 13 and 28, 2008 among the top ten one day wonders. The losses for both of the one-day 2008 rallies at the March 2009 were 31.1% and 28.7% respectively.

Of the 100 best percentage gain days for the Dow since 1901, 29 of them occurred between the post 1929 crash and the final July 1932 bottom.  From the 1932 bottom to the end of 1933 accounted for an additional 23 of the 100 best days. All of those rallies were profitable. From the low to the end of 1933, the Dow increased by more than 100%.  The only other period or year which had concentrated representation in the top 100 was 2008 which had seven.

The Wall Street Journal’s error is significant since 100% of the top 100 best one day rallies from:

  • October 1929 to July 1932 resulted in significant losses
  • July 1932 bottom to end of 1933 resulted in significant gains

The error has created a false sense of security for investors and especially for investment professionals, who are aware that after the 1929 crash, the Dow bottomed in 1932.   Had the performance for the Dow’s performance cited in the headline been compared to 1929, the context of the article would have been very bearish instead of somewhat bullish.

From my preliminary empirical research findings there were only seven bull market rallies within the top 100 one day percentage gainers. Three of seven  in the table below were represented by 1987 and two by 2009.

The three post 1987 “Black Monday’ crash rallies enabled the secular bull which began in 2002 to resume. To understand why it’s not possible for the secular bull which began in 2009 to resume read my two March 2020 articles below.  The 1987 crash does not share the genealogy of the Dow 1929, NASDAQ 2000 and the 2020 crashes for the markets of the US, Japan, Germany, Canada, France and South Korea which are now underway.

Based on the findings from my empirical research the probability is 94.4% (17/18) that the Dow 2020’s one day and three-day top ten percentage gainers last week were bear market rallies.         

Many are hopeful that the crash which has been underway since February 20, 2020, is just a correction for the continuation of the secular bull market which began in 2009.  Based on my just concluded empirical research of the Dow’s best daily and three-day gains and my previous findings from my prior statistical crash probability analysis, the rationale is in place for the markets to continue to crash.   My deep fear is that the world is on the verge of a 1930’s style economic depression.

Everyone should take advantage of the Bear market rally that is currently underway to exit the market as soon as possible.

  • According to the Statistical Crash Probability Analysis (SCPA) forecast the probability is 100% that the relief rally high has either already occurred or will occur by April 8, 2020.
  • The probability is the same for the markets of the six countries to make new lows by April 30, 2020.

For more about the SCPA click here for access to all of my 2020 crash related articles.  To view the SCPA’s very accurate track record for March 2020 click here.

All mutual funds and stocks over $5.00 per share should be liquidated by April 8th. My suggestion is to utilize a methodical approach by liquidating 20% of all holdings per day from April 1st to April 8th.

The SCPA is also forecasting the probability is 100% for the coming attractions from the crash of 2020:

  • Interim bottom by or before May 4, 2020
  • At interim bottom market will be 41% to 44% below 2020 highs
  • Post-crash high before the journey begins to final Q 4 2022 bottom will occur from June 24, 2020 to September 18, 2020.
  • Post-crash highs to get market to within 17% of 2020 highs.

My only argument against the SCPA’s statistical probability analyses is can the markets get back to above, or even to their March/April 2020 post-crash relief rally highs?  The simultaneous crashes in multiple markets for more than one country, let alone six countries, is historically unprecedented.

My hunch is that the damage to the markets and economies of the world’s leading developed countries will be much more severe than the damage caused by the 1929 crash.  The relief rally highs could prove to be the post-crash highs.

If that proves to be the case, according to the SCPA the probability is 100% that it will take the markets a minimum of 15 years to get back above the highs already made by the relief rally and longer to get back to their post-crash highs. Additionally, the findings from my extensive research on all of the secular bear markets since 1929 further support the SCPA’s forecast.

There are only three reasons why anyone who is reading my articles would not to sell:

  1. Waiting to get back to break even.  It’s against human nature to take losses.  
  2. Not wanting to pay capital gains.  Securities with gains can be “sold short against the box” to delay a taxable capital gain,
  3. Financial advisor advising otherwise.  Beware of the following:

a) An advisor’s largest percentage fee that can be charged is for the amount that an investor has in stocks.  If the investor is in cash the advisor can-not charge the fee.

b) The majority of financial advisors are affiliated with big brand name firms including Merrill Lynch, Morgan Stanley, Goldman Sachs and UBS, etc.  These advisors have to follow the party line. They do not have the independence to get their clients out of the market even if they wanted to.

c) The financial advisor industry utilizes propaganda to get clients to remain invested during volatile periods. Read “No One Saw It Coming’ – Should You Worry About The 10-Best Days” by Lance Roberts. He is among a few of the independent advisors who I know which had his clients’ 90% out of the market.

TPA Analytics: Death Cross On Russell 3000 Signals More Pain To Come

Jeffrey Marcus is the President of Turning Point Analytics. Turning Point Analytics utilizes a time-tested, real world strategy that optimizes client’s entry and exit points and adds alpha. TPA defines each stock as Trend or Range to identify actionable inflection points. For more information on TPA check out: http://www.TurningPointAnalyticsllc.com


Major Market Buy/Sell Review: 03-30-20

HOW TO READ THE CHARTS

There are three primary components to each chart:

  • The price chart is in orange
  • The Over Bought/Over Sold indicator is in gray
  • The Buy / Sell indicator is in blue.

When the gray indicator is at the TOP of the chart, there is typically more risk and less reward available at the current time. In other words, the best time to BUY is when the short-term condition is over-sold. Likewise when the buy/sell indicator is above the ZERO line investments have a tendency of working better than when below the zero line.

With this basic tutorial let’s review the major markets.

S&P 500 Index 

  • We previosly wrote: “With the market now 3-standard deviations oversold, a bounce is likely next week as it is expected the Fed will cut rates and restart a substantial QE program. A retracement to the 31.8%, 50%, 62.8% levels are possible and each level should be used to reduce equity risk and hedge.”
  • Well, that bounce finally came and it was a vicious as we expected. While this remains a “bear market” rally, the media was quick to jump on the “Bear market is over” bandwagon. It isn’t, and investors will likely pay a dear price in April.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No position
    • This Week: No position
    • Stop-loss set at $220
    • Long-Term Positioning: Bearish

Dow Jones Industrial Average

  • The same situation exists with DIA.
  • The bounce we discussed previously retraced to the 38.2% retracement level and failed. While Monday and Tuesday could see a push higher for quarter end rebalancing, this is still a bear market to be sold into. 
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No positions
    • This Week: No positions.
    • Stop-loss set at $185
  • Long-Term Positioning: Bearish

Nasdaq Composite

  • Last Monday, in anticipation of a rally, we put on a small QQQ trade. The rally did occur and ran into resistance at the 38.2% retracement level. We closed out the trade Friday afternoon, as we were unwilling to hold over the weekend.
  • We may put on another trade soon, depending on getting the right setup. April promises to be sloppy. 
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No positions
    • This Week: No positions
    • Stop-loss set at $170
  • Long-Term Positioning: Bearish due to valuations

S&P 600 Index (Small-Cap)

  • As noted last week, small-caps are extremely oversold, and on a very deep “sell signal.”  They did bounce this past week, but underperformed the major indexes substantially. 
  • Avoid small-caps. This particular group of stocks are the most susceptible to an economic slowdown from the virus. Use any reflexive rally to step-aside for the time being.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No positions
    • This Week: No positions.
    • Stop loss adjusted to $42 on trading positions.
  • Long-Term Positioning: Bearish

S&P 400 Index (Mid-Cap)

  • As with Small-cap, we have no holdings. 
  • MDY is oversold, and is on a very deep a “sell signal.” The rally this past week also underperformed the broad market. 
  • As noted last week, “MDY is oversold enough for a counter-trend bounce to sell into. Trading positions only.” That rally is likely done for now.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No holding
    • This Week: No holding
  • Long-Term Positioning: Bearish

Emerging Markets

  • As noted last week, EEM was extremely oversold and on a deep sell-signal. A bounce was likely which occurred. 
  • We previously stated that investors should use counter-trend rallies to sell into. Do that now.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No position
    • This Week: No position.
    • Stop-loss set at $30 for trading positions.
  • Long-Term Positioning: Bearish

International Markets

  • Like EEM, EFA was also sold previously. as we return our focus back to large cap value.
  • As noted last week: “EFA is very sold and on a deep sell signal. A reflexive rally is likely. Use those levels to sell into.”  Do so this week.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No position.
    • This Week: No position.
    • Stop-loss set at $46 for trading positions.
  • Long-Term Positioning: Bearish

West Texas Intermediate Crude (Oil)

  • We still like the sector from a “value” perspective and expect that we will wind up making a lot of money here. We clearly aren’t at lows yet, so be patient. 
  • Oil continues to weaken and supplies are building as economic shutdowns are not good for the crude market. Bankruptcies are rising as well. 
  • Avoid for now.
  • Short-Term Positioning: Bearish
    • Last Week: No positions
    • This Week: No positions.
    • Stops Triggered for any direct crude oil positions.
  • Long-Term Positioning: Bearish

Gold

  • Last week we noted: “It seems that liquidation event may be passing. If Gold can climb back above the 200-dma we will look to add back our holdings.
  • It did.
  • We added to our position in IAU and continue to have a small holding in GDX, as the previous liquidation left a lot of value in the sector. 
  • Short-Term Positioning: Bullish
    • Last week: Hold positions.
    • This week: Added to position
    • Stop-loss set at $137.50.
    • Long-Term Positioning: Bullish

Bonds (Inverse Of Interest Rates)

  • We have reduced our overall bond exposure, because we are running a very reduced equity exposure currently. This aligns our “hedge” of fixed income relative to our equity book. 
  • We remain very cautious on our bond exposure currently, and will look to add to that exposure once the credit markets calm down a bit. 
  • Short-Term Positioning: Neutral
    • Last Week: Hold positions
    • This Week: Hold positions
    • Stop-loss is moved up to $147.50
    • Long-Term Positioning: Bullish

U.S. Dollar

  • Previously we stated: “This past week, the dollar surged through that resistance and is now extremely overbought short-term. Looking for a reflexive rally in stocks next week that pulls the dollar back towards the breakout level of last week.”
  • That occurred this past week, and the dollar is now approaching its moving average support. 
  • The credit crisis, and rush to cash, sent the dollar surging to 7-deviations above the mean. As we noted previously, with the credit markets calming down we are starting to see previous relationships between asset classes return to normal. 
  • The dollar has reversed its sell signal, which suggests dollar strength may be with us for a while longer.

Bull Market? No, The Bear Still Rules For Now (Full Report)


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Bull Market? No, The Bear Still Rules For Now.

Last week, we asked the question, “Is the bear market over?”

Our answer was simple: The ‘Bear Market’ won’t be over until the credit markets get fixed.”

On Monday, the market sold off to new lows, forcing the Federal Reserve to inject more liquidity to try and stabilize the “broken” credit market.  Then on Tuesday, before the markets opened, we wrote:

“From a purely technical basis, the extreme downside extension, and potential selling exhaustion, has set the markets up for a fairly strong reflexive bounce. This is where fun with math comes in.

As shown in the chart below, after a 35% decline in the markets from the previous highs, a rally to the 38.2% Fibonacci retracement would encompass a 20% advance.

Such an advance will ‘lure’ investors back into the market, thinking the ‘bear market’ is over.”

Chart Updated Through Friday

Not surprisingly, here were the headlines, almost exactly as we wrote them:

Well, you get the idea.

While it was indeed a sharp “reflex rally,” and expected, “bear markets” are not resolved in a single month. More importantly, “bear markets” only end when NO ONE wants to buy it.” 

Fed Can’t Fix It

As noted above, the “bear market” will NOT be over until the credit market is fixed. We are a long way from that being done, given the blowout in yields currently occurring.

However, the Fed is throwing the proverbial “kitchen sink” at the issue. As Jim Bianco noted on Friday:

“In just these past few weeks:

  • The Fed has cut rates by 150 basis points to near zero and run through its entire 2008 crisis handbook.
  • That wasn’t enough to calm markets, though — so the central bank also announced $1 trillion a day in repurchase agreements and unlimited quantitative easing, which includes a hard-to-understand $625 billion of bond-buying a week going forward. At this rate, the Fed will own two-thirds of the Treasury market in a year.

But it’s the alphabet soup of new programs that deserve special consideration, as they could have profound long-term consequences for the functioning of the Fed and the allocation of capital in financial markets. Specifically, these are:

  • CPFF (Commercial Paper Funding Facility) – buying commercial paper from the issuer.
  • PMCCF (Primary Market Corporate Credit Facility) – buying corporate bonds from the issuer.
  • TALF (Term Asset-Backed Securities Loan Facility) – funding backstop for asset-backed securities.
  • SMCCF (Secondary Market Corporate Credit Facility) – buying corporate bonds and bond ETFs in the secondary market.
  • MSBLP (Main Street Business Lending Program) – Details are to come, but it will lend to eligible small and medium-sized businesses, complementing efforts by the Small Business Association.

To put it bluntly, the Fed isn’t allowed to do any of this.”

However, on Friday, the Federal Reserve ran into a problem, which could poses a risk for the markets going forward. As Jim noted, the mind-boggling pace of bond purchases quickly hit the limits of what was available to pledge for collateral.

Or rather, the Fed’s “unlimited QE,” may not be so “unlimited” after all.

The consequence is the Fed is already having to start cutting back on its QE program. That news fueled the late-day sell-off Friday afternoon. (Charts courtesy of Zerohedge)

While Congress did pass the “CARES” act on Friday, it will do little to backstop what is about to happen to the economy for two primary reasons:

  1. The package will only support the economy for up to two months. Unfortunately, there is no framework for effective and timely deployment; firms are already struggling to pay rents, there are pockets of funding stress in credit markets as default risks build, and earnings guidance is abandoned. 
  2. The unprecedented uncertainty facing financial markets on the duration of social distancing, the depth of the economic shock and when the infection rate curve will flatten, and there are many unknowns which will further undermine confidence.

Both of these points are addressed in this week’s Macroview but here are the two salient points to support my statement:

Most importantly, as shown below, the majority of businesses will run out of money long before SBA loans, or financial assistance, can be provided. This will lead to higher and longer-duration of, unemployment.”

“While there is much hope that the current ‘economic shutdown’ will end quickly, we are still very early in the infection cycle relative to other countries. Importantly, we are substantially larger than most, and on a GDP basis, the damage will be worse.”

What the cycle tells us is that jobless claims, unemployment, and economic growth are going to worsen materially over the next couple of quarters.

The problem with the current economic backdrop, and mounting job losses, is the vast majority of American’s were woefully unprepared for any type of disruption to their income going into the recession. As job losses mount, a virtual spiral in the economy begins as reductions in spending put further pressures on corporate profitability. Lower profits leads to higher unemployment and lower asset prices until the cycle is complete.

The Bear Still Rules

This past week, we published several pieces of analysis for our RIAPro Subscribers (30-Day Risk Free Trial) discussing why this was a “bear market rally” to be sold into. On Friday, our colleague, Jeffery Marcus of TP Analystics, penned the following:

  1. The long term bull pattern that existed since the 3/9/09 is over. That means the pattern of investors confidently buying every decline is over.
  2. The market became historically oversold on 3/23 using many metrics, and that oversold condition coincided with the long term support area of S&P 500 2110-2180.
  3. The short-covering and rebalancing had a lot to do with the size and speed of the 3-day rally.  Also, we know the lack of  ETF liquidity played a huge role as well as algorithmic trading.
  4. Technically the market can still go up 6.9% higher from here to hit the 50% retracement level (3386 – 2237 = 1149/2 = 574 + 2237 = 2811….2811/2630 = +6.9%.) I would not bet on it.
  5. The market only sustains a rally once there is light at the Coronavirus tunnel. 
  6. I do not think the S&P 500 will hit a new high this year. Maybe not in 2021, either.

His analysis agrees with our own, which we discussed with you last week.

“The good news is the markets are now more extremely oversold on a variety of measures than at just about any other point in history.

Warning: Any reversal will NOT BE the bear market bottom. It will be a ‘bear market’ rally you will want to ‘sell’ into. The reason is there are still many investors trapped in ‘buy and hold’ and ‘passive indexing’ strategies that are actively seeking an exit. Any rallies will be met with redemptions.

Most importantly, all of our long-term weekly ‘sell signals’ have now been triggered. Such would suggest that a rally back to the ‘bullish trend line’ from 2009 will likely be the best opportunity to ‘sell’ before the ‘bear market’ finds its final low.”

Last week’s chart updated through Friday’s close.

While the recent lows may indeed turn out to be “the bottom,” I highly suspect they won’t. Given the sell signals have been registered at such high levels, the time, and distance, needed to reverse the excesses will require a deeper market draw.

As Jeff Hirsch from Stocktrader’s Alamanc noted:

“While we are all rooting for the market to find support here so much damage has been done. A great deal of uncertainty remains for the economy and health crisis. This looks like a bear market bounce. 

History suggests that we are in for some tough sledding in the market this year with quite a bit of chop. When the January Barometer came in with a negative reading, our outlook for 2020 began to diminish as every down January since 1950 has been followed by a new or continuing bear market, a 10% correction, or a flat year. Then another warning sign flashed when DJIA closed below its December closing low on February 26, 2020 as the impact of this novel coronavirus began to take its toll on Wall Street.

In the March Outlook, we presented this graph of the composite seasonal pattern for the 22 years since 1950 when both the January Barometer as measured by the S&P 500 were down, and the Dow closed below its previous December closing low in the first quarter. Below is a graph of DJIA, S&P 500 and NASDAQ Composite for 2020 year-to-date as of the close on March 25. Comparing 2020 market action to these 22 years, suggests a choppy year ahead with the potential for several tests of the recent low.”

“The depth of this waterfall decline may be too deep for the market to rebound quickly. This bear market also put this year’s Best Six Months (November-April) at risk of being negative. The record of down Best Six Months is not encouraging and it reminds us of a salient quote from the Almanac from an old market sage,

If the market does not rally, as it should during bullish seasonal periods, it is a sign that other forces are stronger and that when the seasonal period ends those forces will really have their say.’— Edson Gould (Stock market analyst, Findings & Forecasts, 1902-1987)'”

On a short-term basis, the market is also suggesting some risk. The daily chart below shows the market rallied to, and failed at, the first level of the Fibonacci retracement we outlined last week, suggesting profits be taken at this level. While there are two remaining targets for the bear market rally, the probabilities weigh heavily against them. (This doesn’t mean they can’t be achieved, it is “possible,” just not “probable.”)

Furthermore, with the “Death Cross” triggering on Friday (the 50-dma crossing below the 200-dma), this will put further downside pressure on any “bear market” advance from current levels.

Given the magnitude, and multiple confirmations, of these signals, it is far too soon to assume the “bear market” is over. This is particularly the case, given the sell-off is less than one-month-old.

Bear markets, and recessions, tend to last 18-months on average.

The current bear market and recession are not the results of just the “coronavirus” shock. It is the result of many simultaneous shocks from:

  • Economic disruption
  • Surging unemployment
  • Oil price shock
  • Collapsing consumer confidence, and
  • Most importantly, a “credit event.”

We likely have more to go before we can safely assume we have turned the corner.

In the meantime, use rallies to raise cash. Don’t worry about trying to “buy the bottom.” There will be plenty of time to see “THE” bottom is in, and having cash will allow you to “buy stocks” from the last of the “weak hands.” 


The MacroView

If you need help or have questions, we are always glad to help. Just email me.

See You Next Week

By Lance Roberts, CIO


Market & Sector Analysis

Data Analysis Of The Market & Sectors For Traders


S&P 500 Tear Sheet


Performance Analysis


Technical Composite

Note: The technical gauge bounced from the lowest level since both the “Dot.com” and “Financial Crisis.” However, note the gauge bottoms BEFORE the market bottoms. In 2002, lows were retested. In 2008, there was an additional 22% decline in early 2009.


ETF Model Relative Performance Analysis


Sector & Market Analysis:

Be sure and catch our updates on Major Markets (Monday) and Major Sectors (Tuesday) with updated buy/stop/sell levels

Sector-by-Sector

Finally, the markets bounced this past week.

However, don’t get too excited; there has been a tremendous amount of technical damage done which keeps us on the sidelines for now.

Improving – Discretionary (XLY), and Real Estate (XLRE)

We previously reduced our weightings to Real Estate and liquidated Discretionary entirely over concerns of the virus and impact on the economy. No change this week. We are getting more interested in REITs again, but are going to select individual holdings versus the ETF due to leverage concerns in the REITs.

Discretionary is going to remain under pressure due to people being able to go out and shop. This sector will eventually get a bid, so we are watching it, but we need to see an eventual end to the isolation of consumers.

Current Positions: No Positions

Outperforming – Technology (XLK), Communications (XLC), Staples (XLP), Healthcare (XLV), and Utilities (XLU)

Early last week, we shifted exposures in portfolios and added to our Technology and Communications sectors, bringing them up to weight. We also added QQQ, which was closed out on Friday.

Current Positions: XLK, XLC, 1/2 weight XLP, XLV

Weakening – None

No sectors in this quadrant.

Current Position: None

Lagging – Industrials (XLI), Financials (XLF), Materials (XLB), and Energy (XLE)

No change from last week, with the exception that performance continued to be worse than the overall market.

These sectors are THE most sensitive to Fed actions (XLF) and the shutdown of the economy. We eliminated all holdings in late February and early March.

Current Position: None

Market By Market

Small-Cap (SLY) and Mid Cap (MDY) – Four weeks ago, we sold all small-cap and mid-cap exposure over concerns of the impact of the coronavirus. We remain out of these sectors for now.

Current Position: None

Emerging, International (EEM) & Total International Markets (EFA)

Same as small-cap and mid-cap. Given the spread of the virus and the impact on the global supply chain. Trading opportunities only.

Current Position: None

S&P 500 Index (Core Holding) – Given the rapid deterioration of the broad market, we sold our entire core position holdings for the safety of cash. We did add a small trading position in QQQ on Monday afternoon, and sold it on Friday.

Current Position: None

Gold (GLD) – We added a small position in GDX recently, and increased our position in IAU early this week. With the Fed going crazy with liquidity, this will be good for gold long-term, so we continue to add to our holdings on corrections.

Current Position: 1/4th weight GDX, 1/2 weight IAU

Bonds (TLT) –

Bonds regained their footing this week, as the Fed became the “buyer” of both “first” and “last” resort. Simply, “bonds will not be allowed to default,” as the Fed will guarantee payments to creditors. We have now reduced our total bond exposure to 20% of the portfolio from 40% since we are only carrying 10% equity currently. (Rebalanced our hedge.) 

Current Positions: SHY, IEF, BIL

Sector / Market Recommendations

The table below shows thoughts on specific actions related to the current market environment.

(These are not recommendations or solicitations to take any action. This is for informational purposes only related to market extremes and contrarian positioning within portfolios. Use at your own risk and peril.)

Portfolio/Client Update:

Despite the headlines of the “biggest rally in history” this past week, it’s easy to get sucked into the “Media headline” hype. However, let’s put this into some perspective:

Over the last “X” days the S&P 500 is:

  • 5-days: +10.2% 
  • 6-days: +5.4%
  • 10-days: -6.25%

It is much less exciting when compared to the fastest 30% plunge in history.

Keeping some perspective on where we are currently is very important. It’s easy to get swayed by the media headlines, which can lead us into making emotional investment mistakes. More often than not, emotional decisions turn out poorly.

We are starting our process of adding equities to the ETF models. As we head out of this bear market, ETF’s will have less value relative to our selective strategies.

This doesn’t mean we won’t use ETF’s at all, but we will selectively use them to fill in gaps to our individual equity selection, or for short-term trading opportunities.

Such was the case on Monday when we took on a position in QQQ for a bounce, and was subsequently closed out on Friday.

We also added small holdings of CLX and MRK to our long-term equity portfolio, as well as increased our exposure to IAU.

We continue to remain very defensive, and are in an excellent position with plenty of cash, reduced bond holdings, and minimal equity exposure in companies we want to own for the next 10-years.

We are just patiently waiting for the right opportunity to buy large chunks of these holdings with both stable, and higher yields.

Let me repeat from last week:

  1. The ONLY people who care more about your money than you, is all of us at RIA Advisors.
  2. We will NOT “buy the bottom” of the market. We will buy when we SEE the bottom of the market is in and risk/reward ratios are clearly in our favor. 
  3. This has been THE fastest bear market in history. We are doing our best to preserve your capital so that you meet your financial goals. Bear markets are never fun, but they are necessary for future gains. 
  4. We’ve got this.

Please don’t hesitate to contact us if you have any questions, or concerns.

Lance Roberts

CIO


THE REAL 401k PLAN MANAGER

A Conservative Strategy For Long-Term Investors


Model performance is based on a two-asset model of stocks and bonds relative to the weighting changes made each week in the newsletter. This is strictly for informational and educational purposes only and should not be relied upon for any reason. Past performance is not a guarantee of future results. Use at your own risk and peril.

401k Plan Manager Live Model

As an RIA PRO subscriber (You get your first 30-days free) you have access to our live 401k p

The code will give you access to the entire site during the 401k-BETA testing process, so not only will you get to help us work out the bugs on the 401k plan manager, you can submit your comments about the rest of the site as well.

We are building models specific to company plans. So, if you would like to see your company plan included specifically, send me the following:

  • Name of the company
  • Plan Sponsor
  • A print out of your plan choices. (Fund Symbol and Fund Name)

If you would like to offer our service to your employees at a deeply discounted corporate rate, please contact me.

Bull Market? No, The Bear Still Rules For Now.


  • Bull Market? No, The Bear Still Rules
  • MacroView: The Fed Can’t Fix What’s Broken
  • Sector & Market Analysis
  • 401k Plan Manager

Follow Us On: Twitter, Facebook, Linked-In, Sound Cloud, Seeking Alpha


2020 Investment Summit – April 2nd.

The “2020 SOCIALLY DISTANT INVESTMENT SUMMIT” is coming on Thursday, April 2nd.

Click the link below to receive an email with a special “invitation only” link when the summit goes “live.” (Current newsletter subscribers are already registered.)


Catch Up On What You Missed Last Week


Bull Market? No, The Bear Still Rules For Now.

Last week, we asked the question, “Is the bear market over?”

Our answer was simple: The ‘Bear Market’ won’t be over until the credit markets get fixed.”

On Monday, the market sold off to new lows, forcing the Federal Reserve to inject more liquidity to try and stabilize the “broken” credit market.  Then on Tuesday, before the markets opened, we wrote:

“From a purely technical basis, the extreme downside extension, and potential selling exhaustion, has set the markets up for a fairly strong reflexive bounce. This is where fun with math comes in.

As shown in the chart below, after a 35% decline in the markets from the previous highs, a rally to the 38.2% Fibonacci retracement would encompass a 20% advance.

Such an advance will ‘lure’ investors back into the market, thinking the ‘bear market’ is over.”

Chart Updated Through Friday

Not surprisingly, here were the headlines, almost exactly as we wrote them:

Well, you get the idea.

While it was indeed a sharp “reflex rally,” and expected, “bear markets” are not resolved in a single month. More importantly, “bear markets” only end when NO ONE wants to buy it.” 

Fed Can’t Fix It

As noted above, the “bear market” will NOT be over until the credit market is fixed. We are a long way from that being done, given the blowout in yields currently occurring.

However, the Fed is throwing the proverbial “kitchen sink” at the issue. As Jim Bianco noted on Friday:

“In just these past few weeks:

  • The Fed has cut rates by 150 basis points to near zero and run through its entire 2008 crisis handbook.
  • That wasn’t enough to calm markets, though — so the central bank also announced $1 trillion a day in repurchase agreements and unlimited quantitative easing, which includes a hard-to-understand $625 billion of bond-buying a week going forward. At this rate, the Fed will own two-thirds of the Treasury market in a year.

But it’s the alphabet soup of new programs that deserve special consideration, as they could have profound long-term consequences for the functioning of the Fed and the allocation of capital in financial markets. Specifically, these are:

  • CPFF (Commercial Paper Funding Facility) – buying commercial paper from the issuer.
  • PMCCF (Primary Market Corporate Credit Facility) – buying corporate bonds from the issuer.
  • TALF (Term Asset-Backed Securities Loan Facility) – funding backstop for asset-backed securities.
  • SMCCF (Secondary Market Corporate Credit Facility) – buying corporate bonds and bond ETFs in the secondary market.
  • MSBLP (Main Street Business Lending Program) – Details are to come, but it will lend to eligible small and medium-sized businesses, complementing efforts by the Small Business Association.

To put it bluntly, the Fed isn’t allowed to do any of this.”

However, on Friday, the Federal Reserve ran into a problem, which could poses a risk for the markets going forward. As Jim noted, the mind-boggling pace of bond purchases quickly hit the limits of what was available to pledge for collateral.

Or rather, the Fed’s “unlimited QE,” may not be so “unlimited” after all.

The consequence is the Fed is already having to start cutting back on its QE program. That news fueled the late-day sell-off Friday afternoon. (Charts courtesy of Zerohedge)

While Congress did pass the “CARES” act on Friday, it will do little to backstop what is about to happen to the economy for two primary reasons:

  1. The package will only support the economy for up to two months. Unfortunately, there is no framework for effective and timely deployment; firms are already struggling to pay rents, there are pockets of funding stress in credit markets as default risks build, and earnings guidance is abandoned. 
  2. The unprecedented uncertainty facing financial markets on the duration of social distancing, the depth of the economic shock and when the infection rate curve will flatten, and there are many unknowns which will further undermine confidence.

Both of these points are addressed in this week’s Macroview but here are the two salient points to support my statement:

Most importantly, as shown below, the majority of businesses will run out of money long before SBA loans, or financial assistance, can be provided. This will lead to higher and longer-duration of, unemployment.”

“While there is much hope that the current ‘economic shutdown’ will end quickly, we are still very early in the infection cycle relative to other countries. Importantly, we are substantially larger than most, and on a GDP basis, the damage will be worse.”

What the cycle tells us is that jobless claims, unemployment, and economic growth are going to worsen materially over the next couple of quarters.

The problem with the current economic backdrop, and mounting job losses, is the vast majority of American’s were woefully unprepared for any type of disruption to their income going into the recession. As job losses mount, a virtual spiral in the economy begins as reductions in spending put further pressures on corporate profitability. Lower profits leads to higher unemployment and lower asset prices until the cycle is complete.

The Bear Still Rules

This past week, we published several pieces of analysis for our RIAPro Subscribers (30-Day Risk Free Trial) discussing why this was a “bear market rally” to be sold into. On Friday, our colleague, Jeffery Marcus of TP Analystics, penned the following:

  1. The long term bull pattern that existed since the 3/9/09 is over. That means the pattern of investors confidently buying every decline is over.
  2. The market became historically oversold on 3/23 using many metrics, and that oversold condition coincided with the long term support area of S&P 500 2110-2180.
  3. The short-covering and rebalancing had a lot to do with the size and speed of the 3-day rally.  Also, we know the lack of  ETF liquidity played a huge role as well as algorithmic trading.
  4. Technically the market can still go up 6.9% higher from here to hit the 50% retracement level (3386 – 2237 = 1149/2 = 574 + 2237 = 2811….2811/2630 = +6.9%.) I would not bet on it.
  5. The market only sustains a rally once there is light at the Coronavirus tunnel. 
  6. I do not think the S&P 500 will hit a new high this year. Maybe not in 2021, either.

His analysis agrees with our own, which we discussed with you last week.

“The good news is the markets are now more extremely oversold on a variety of measures than at just about any other point in history.

Warning: Any reversal will NOT BE the bear market bottom. It will be a ‘bear market’ rally you will want to ‘sell’ into. The reason is there are still many investors trapped in ‘buy and hold’ and ‘passive indexing’ strategies that are actively seeking an exit. Any rallies will be met with redemptions.

Most importantly, all of our long-term weekly ‘sell signals’ have now been triggered. Such would suggest that a rally back to the ‘bullish trend line’ from 2009 will likely be the best opportunity to ‘sell’ before the ‘bear market’ finds its final low.”

Last week’s chart updated through Friday’s close.

While the recent lows may indeed turn out to be “the bottom,” I highly suspect they won’t. Given the sell signals have been registered at such high levels, the time, and distance, needed to reverse the excesses will require a deeper market draw.

As Jeff Hirsch from Stocktrader’s Alamanc noted:

“While we are all rooting for the market to find support here so much damage has been done. A great deal of uncertainty remains for the economy and health crisis. This looks like a bear market bounce. 

History suggests that we are in for some tough sledding in the market this year with quite a bit of chop. When the January Barometer came in with a negative reading, our outlook for 2020 began to diminish as every down January since 1950 has been followed by a new or continuing bear market, a 10% correction, or a flat year. Then another warning sign flashed when DJIA closed below its December closing low on February 26, 2020 as the impact of this novel coronavirus began to take its toll on Wall Street.

In the March Outlook, we presented this graph of the composite seasonal pattern for the 22 years since 1950 when both the January Barometer as measured by the S&P 500 were down, and the Dow closed below its previous December closing low in the first quarter. Below is a graph of DJIA, S&P 500 and NASDAQ Composite for 2020 year-to-date as of the close on March 25. Comparing 2020 market action to these 22 years, suggests a choppy year ahead with the potential for several tests of the recent low.”

“The depth of this waterfall decline may be too deep for the market to rebound quickly. This bear market also put this year’s Best Six Months (November-April) at risk of being negative. The record of down Best Six Months is not encouraging and it reminds us of a salient quote from the Almanac from an old market sage,

If the market does not rally, as it should during bullish seasonal periods, it is a sign that other forces are stronger and that when the seasonal period ends those forces will really have their say.’— Edson Gould (Stock market analyst, Findings & Forecasts, 1902-1987)'”

On a short-term basis, the market is also suggesting some risk. The daily chart below shows the market rallied to, and failed at, the first level of the Fibonacci retracement we outlined last week, suggesting profits be taken at this level. While there are two remaining targets for the bear market rally, the probabilities weigh heavily against them. (This doesn’t mean they can’t be achieved, it is “possible,” just not “probable.”)

Furthermore, with the “Death Cross” triggering on Friday (the 50-dma crossing below the 200-dma), this will put further downside pressure on any “bear market” advance from current levels.

Given the magnitude, and multiple confirmations, of these signals, it is far too soon to assume the “bear market” is over. This is particularly the case, given the sell-off is less than one-month-old.

Bear markets, and recessions, tend to last 18-months on average.

The current bear market and recession are not the results of just the “coronavirus” shock. It is the result of many simultaneous shocks from:

  • Economic disruption
  • Surging unemployment
  • Oil price shock
  • Collapsing consumer confidence, and
  • Most importantly, a “credit event.”

We likely have more to go before we can safely assume we have turned the corner.

In the meantime, use rallies to raise cash. Don’t worry about trying to “buy the bottom.” There will be plenty of time to see “THE” bottom is in, and having cash will allow you to “buy stocks” from the last of the “weak hands.” 


The MacroView

If you need help or have questions, we are always glad to help. Just email me.

See You Next Week

By Lance Roberts, CIO


Market & Sector Analysis

Data Analysis Of The Market & Sectors For Traders


S&P 500 Tear Sheet


Performance Analysis


Technical Composite

Note: The technical gauge bounced from the lowest level since both the “Dot.com” and “Financial Crisis.” However, note the gauge bottoms BEFORE the market bottoms. In 2002, lows were retested. In 2008, there was an additional 22% decline in early 2009.


ETF Model Relative Performance Analysis


Sector & Market Analysis:

Be sure and catch our updates on Major Markets (Monday) and Major Sectors (Tuesday) with updated buy/stop/sell levels

Sector-by-Sector

Finally, the markets bounced this past week.

However, don’t get too excited; there has been a tremendous amount of technical damage done which keeps us on the sidelines for now.

Improving – Discretionary (XLY), and Real Estate (XLRE)

We previously reduced our weightings to Real Estate and liquidated Discretionary entirely over concerns of the virus and impact on the economy. No change this week. We are getting more interested in REITs again, but are going to select individual holdings versus the ETF due to leverage concerns in the REITs.

Discretionary is going to remain under pressure due to people being able to go out and shop. This sector will eventually get a bid, so we are watching it, but we need to see an eventual end to the isolation of consumers.

Current Positions: No Positions

Outperforming – Technology (XLK), Communications (XLC), Staples (XLP), Healthcare (XLV), and Utilities (XLU)

Early last week, we shifted exposures in portfolios and added to our Technology and Communications sectors, bringing them up to weight. We also added QQQ, which was closed out on Friday.

Current Positions: XLK, XLC, 1/2 weight XLP, XLV

Weakening – None

No sectors in this quadrant.

Current Position: None

Lagging – Industrials (XLI), Financials (XLF), Materials (XLB), and Energy (XLE)

No change from last week, with the exception that performance continued to be worse than the overall market.

These sectors are THE most sensitive to Fed actions (XLF) and the shutdown of the economy. We eliminated all holdings in late February and early March.

Current Position: None

Market By Market

Small-Cap (SLY) and Mid Cap (MDY) – Four weeks ago, we sold all small-cap and mid-cap exposure over concerns of the impact of the coronavirus. We remain out of these sectors for now.

Current Position: None

Emerging, International (EEM) & Total International Markets (EFA)

Same as small-cap and mid-cap. Given the spread of the virus and the impact on the global supply chain. Trading opportunities only.

Current Position: None

S&P 500 Index (Core Holding) – Given the rapid deterioration of the broad market, we sold our entire core position holdings for the safety of cash. We did add a small trading position in QQQ on Monday afternoon, and sold it on Friday.

Current Position: None

Gold (GLD) – We added a small position in GDX recently, and increased our position in IAU early this week. With the Fed going crazy with liquidity, this will be good for gold long-term, so we continue to add to our holdings on corrections.

Current Position: 1/4th weight GDX, 1/2 weight IAU

Bonds (TLT) –

Bonds regained their footing this week, as the Fed became the “buyer” of both “first” and “last” resort. Simply, “bonds will not be allowed to default,” as the Fed will guarantee payments to creditors. We have now reduced our total bond exposure to 20% of the portfolio from 40% since we are only carrying 10% equity currently. (Rebalanced our hedge.) 

Current Positions: SHY, IEF, BIL

Sector / Market Recommendations

The table below shows thoughts on specific actions related to the current market environment.

(These are not recommendations or solicitations to take any action. This is for informational purposes only related to market extremes and contrarian positioning within portfolios. Use at your own risk and peril.)

Portfolio/Client Update:

Despite the headlines of the “biggest rally in history” this past week, it’s easy to get sucked into the “Media headline” hype. However, let’s put this into some perspective:

Over the last “X” days the S&P 500 is:

  • 5-days: +10.2% 
  • 6-days: +5.4%
  • 10-days: -6.25%

It is much less exciting when compared to the fastest 30% plunge in history.

Keeping some perspective on where we are currently is very important. It’s easy to get swayed by the media headlines, which can lead us into making emotional investment mistakes. More often than not, emotional decisions turn out poorly.

We are continuing our process of blending the Equity and ETF models. As we head out of this bear market, ETF’s will have much less value relative to our selective strategies.

This doesn’t mean we won’t use ETF’s at all, but we will selectively use them to fill in gaps to our individual equity selection, or for short-term trading opportunities.

Such was the case on Monday when we took on a position in QQQ for a bounce, and was subsequently closed out on Friday.

We also added small holdings of CLX and MRK to our long-term portfolio, as well as increased our exposure to IAU.

We continue to remain very defensive, and are in an excellent position with plenty of cash, reduced bond holdings, and minimal equity exposure in companies we want to own for the next 10-years.

We are just patiently waiting for the right opportunity to buy large chunks of these holdings with both stable, and higher yields.

Let me repeat from last week:

  1. The ONLY people who care more about your money than you, is all of us at RIA Advisors.
  2. We will NOT “buy the bottom” of the market. We will buy when we SEE the bottom of the market is in and risk/reward ratios are clearly in our favor. 
  3. This has been THE fastest bear market in history. We are doing our best to preserve your capital so that you meet your financial goals. Bear markets are never fun, but they are necessary for future gains. 
  4. We’ve got this.

Please don’t hesitate to contact us if you have any questions, or concerns.

Lance Roberts

CIO


THE REAL 401k PLAN MANAGER

A Conservative Strategy For Long-Term Investors


Model performance is based on a two-asset model of stocks and bonds relative to the weighting changes made each week in the newsletter. This is strictly for informational and educational purposes only and should not be relied upon for any reason. Past performance is not a guarantee of future results. Use at your own risk and peril.

401k Plan Manager Live Model

As an RIA PRO subscriber (You get your first 30-days free) you have access to our live 401k p

The code will give you access to the entire site during the 401k-BETA testing process, so not only will you get to help us work out the bugs on the 401k plan manager, you can submit your comments about the rest of the site as well.

We are building models specific to company plans. So, if you would like to see your company plan included specifically, send me the following:

  • Name of the company
  • Plan Sponsor
  • A print out of your plan choices. (Fund Symbol and Fund Name)

If you would like to offer our service to your employees at a deeply discounted corporate rate, please contact me.

#WhatYouMissed On RIA This Week: 03-27-20

We know you get busy and don’t check our website as often as you might like. Plus, with so much content being pushed out every week from the RIA Team, we thought we would send you a weekly synopsis of everything you might have missed.

The Week In Blogs

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Our Latest Newsletter

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What You Missed At RIA Pro

RIA Pro is our premium investment analysis, research, and data service. (Click here to try it now and get 30-days free)

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The Best Of “The Lance Roberts Show

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Seth Levine: COVID-19 Is Not The Last War

These are truly remarkable times in the investment markets. The speed, intensity, and ubiquity of this selloff brings just one word to mind: violence. It would be remarkable if it wasn’t so destructive. Sadly, the reactions from our politicians and the public were predictable. The Federal Reserve (Fed) faithfully and forcefully responded. Despite its unprecedented actions, it seems like they’re “fighting the last war.”

Caveat Emptor

My intention here is to discuss some observations from the course of my career as an investor and try to relate them to the current market. I won’t provide charts or data; I’m just spit-balling here. My goal is twofold: 1) to better organize my own thoughts, and; 2) foster constructive discussions as we all try to navigate these turbulent markets. I realize that this approach puts this article squarely into the dime-a-dozen opinion piece category—so be it.

Please note that what you read is only as of the date published. I will be updating my views as the data warrants. Strong views, held loosely.

The Whole Kit and Caboodle

Investment markets are in freefall. U.S stock market declines tripped circuit breakers on multiple days. U.S. Treasuries are gyrating. Credit markets fell sharply. Equity volatility (characterized by the VIX) exploded. The dollar (i.e. the DXY index) is rocketing. We are in full-out crisis mode. No charts required here

With the Great Financial Crisis of 2008 (GFC) still fresh in the minds of many, the calls for a swift Fed action came loud and fast. Boy, the Fed listen. Obediently, it unleashed its full toolkit, dropping the Fed Funds rate to 0% (technically a 0.00% to 0.25% range), reducing interest on excess reserves, lowering pricing on U.S. dollar liquidity swaps arrangements, and kick-starting a $700 billion QE (Quantitative Easing) program. The initiatives are coming so fast and so furious that it’s hard to keep up! The Fed is even extending credit to primary dealers collateralized by “a broad range of investment grade debt securities, including commercial paper and municipal bonds, and a broad range of equity securities.” Really?!

Reflexively, the central bank threw the whole kit and caboodle at markets in hopes of arresting their declines. It’s providing dollar liquidity in every way it can imagine that’s within its power. However, I have an eerie sense that the Fed is (hopelessly) fighting the last war.

The Last War

There are countless explanations for the GFC. The way I see it is that 2008 was quite literally a financial crisis. The financial system (or plumbing) was Ground Zero. A dizzying array of housing-related structured securities (mortgage backed securities, collateralized debt obligations, asset-backed commercial paper, etc.) served as the foundation for the interconnected, global banking system, upon which massive amounts of leverage were employed.

As delinquencies rose, rating agencies downgraded these structured securities. This evaporated the stock of foundational housing collateral. Financial intuitions suddenly found themselves short on liquidity and facing insolvency. It was like playing a giant game of musical chairs whereby a third of the chairs were suddenly removed, unbeknownst to the participants. At once, a mad scramble for liquidity ensued. However, there simply was not enough collateral left to go around. Panic erupted. Institutions failed. The financial system literally collapsed.

This War

In my view, today’s landscape is quite different. The coronavirus’s (COVID-19) impact is a “real economy” issue. People are stuck at home; lots are not working. Economic activity has ground to a halt. It’s a demand shock to nearly every business model and individual’s finances. Few ever planned for such a draconian scenario.

Source: Variant Perception

Thus, this is not a game of musical chairs in the financial system. Rather, businesses will be forced to hold their breaths until life returns to normal. Cash will burn and balance sheets will stretch. The commercial environment is now one of survival, plain and simple (to say nothing of those individuals infected). Businesses of all sizes will be tested, and in particular small and mid-sized ones that lack access to liquidity lines. Not all will make it. To be sure, the financial system will suffer; however, as an effect, not a primary cause. This war is not the GFC.

Decentralized Solutions Needed

Given this dynamic, I’m skeptical that flooding the financial system with liquidity necessarily helps. In the GFC, a relatively small handful of banks (and finance companies) sat at the epicenter. Remember, finance is a levered industry characterized by timing mismatches of cash flows; it borrows “long” and earns “short.” This intermediation is its value proposition. Thus, extending liquidity can help bridge timing gaps to get them through short-term issues, thereby forestalling their deleveraging.

Today, however, the financial system is not the cause of the crisis. True, liquidity shortfalls are the source of stress. However, they are not limited to any one industry or a handful of identifiable actors. Rather, nearly every business may find itself short on cash. Availing currency to banks does not pay your favorite restaurant’s rent or cover its payroll. Quite frankly, I’m skeptical that any mandated measure can. A centralized solution simply cannot solve a decentralized problem.

Fishing With Dynamite

The speed and intensity at which investment markets are reacting is truly dizzying. In many ways they exceed those in the GFC. To be sure, a response to rapidly eroding fundamentals is appropriate. However, this one seems structural.

In my opinion, the wide-scale and indiscriminate carnage is the calling card of one thing: leverage unwinding. It wouldn’t surprise me to learn of a Long Term Capital Management type of event occurring, whereby some large(?), obscure(?), new (?), leveraged investment fund(s) is (are) being forced to liquidate lots of illiquid positions into thinly traded markets. This is purely a guess. Only time will tell.

Daniel Want, the Chief Investment Officer of Prerequisite Capital Management and one of my favorite investment market thinkers, put it best:

“Something is blowing up in the world, we just don’t quite know what. It’s like if you were to go fishing with dynamite. The explosion happens under the water, but it takes a little while for the fish to rise to the surface.”

Daniel Want, 2020 03 14 Prerequisite Update pt 4

What To Do

This logically raises the question of: What to do? From a policy perspective, I have little to offer as I am simply not an expert in the field (ask me in the comment section if you’re interested in my views). That said, the Fed’s response seems silly. Despite the severe investment market stresses, I don’t believe that we’re reliving the GFC. There’s no nail that requires a central banker’s hammer (as if there ever is one). If a financial crisis develops secondarily, then we should seriously question the value that such a fragile system offers.

Markets anticipate developments. I can envision a number of scenarios in which prices reverse course swiftly (such as a decline in the infection rate, a medical breakthrough, etc.). I can see others leading to a protracted economic contraction, as suggested by the intense market moves. Are serious underlying issues at play, even if secondarily? Or are fragile and idiosyncratic market structures to blame? These are the questions I’m trying to grapple with, weighing the unknowns, and allocating capital accordingly.

As an investor, seeing the field more clearly can be an advantage. Remember, it’s never different this time. Nor, however, is it ever the same. This makes for a difficult paradox to navigate. It’s in chaotic times when an investment framework is most valuable. Reflexively fighting the last war seems silly. Rather, let’s assess the current one as it rapidly develops and try to stay one step ahead of the herd.

Good luck out there and stay safe. Strong views, held loosely.

TPA Analytics: Time To Buy CLX, KR, & MRK

Jeffrey Marcus is the President of Turning Point Analytics. Turning Point Analytics utilizes a time-tested, real world strategy that optimizes client’s entry and exit points and adds alpha. TPA defines each stock as Trend or Range to identify actionable inflection points. For more information on TPA check out: http://www.TurningPointAnalyticsllc.com


The market has had a great 2-day rally, but the Coronavirus will be with us for a while. It is time to go back to stocks that outperformed when the market sank in February and March. The 3 stocks below (CLX, KR, and MRK) have declined recently, but were huge outperformers as the S&P500 dropped over 33%.

CLX – broke out above 15-month resistance in late February as the crisis began in earnest. CLX was the 8th best performer in the S&P1500 between 2/19/20 and 3/23/20. During that period CLX was up 5.25%, while the S&P500 was down 33.92% (see table below). CLX is down 23% in the past 5 days and is right back to the February breakout level, which should be support. TPA’s target is +20%.

CLX CLOROX CO 165.6600 Stop = 156.5487 Target = 198.7920

KR – rose above its 3 ½ year downtrend line in December. KR was the 10th best performer in the S&P1500 between 2/19/20 and 3/23/20. During that period KR was up 3.2%, while the S&P500 was down 33.92% (see table below). KR is down 18% in the past 4 days and is right back the breakout level, which should be support. TPA notes that the ratio of KR/S&P500 also broke out long term and short term and is at support; so it should outperform from here.

KR KROGER CO 27.9400 Stop = 26.4033 Target = 33.5280

MRK – is down 26% from its high on 12/20/19. It was one of the top 70 best performing stocks in the S&P1500 as the S&P500 fell 33.92% from 2/19/20 to 3/23/20. MRK was only down 19.2% (see table below). MRK is now all the way back to its breakout level from August 2018, which should be support. RSI analysis on a weekly basis shows that MRK is long term oversold. Chart 3 shows that the previous 3 times that MRK was this oversold on a weekly basis (2011, 2015, 2017) it was a good time to buy.

MRK MERCK & CO 68.2200 Stop = 64.4679 Target = 81.8640


Michael Markowski: Why You Should Sell The “Bear Market Rally.”

Michael Markowski has been involved in the Capital Markets since 1977. He spent the first 15 years of his career in the Financial Services Industry as a Stockbroker, Portfolio Manager, Venture Capitalist, Investment Banker and Analyst. Since 1996 Markowski has been involved in the Financial Information Industry and has produced research, information and products that have been used by investors to increase their performance and reduce their risk. Read more at BullsNBears.com


In yesterday’s “Crash events forecasting also accurate at calling market tops and bottoms”, March 24, 2020, article the statistical crash probability analysis (SCPA) algorithm forecasted that the probability was 100% that the stock indices for the US, Japan, Germany, South Korea, and France would rally by at least 18% from their 2020 lows.  At the close of the US markets on March 25, 2020, an index in each of the six countries had rallied by a minimum of 18% off of their lows.

The rallies of 18% from the lows for the six countries is the fourth consecutive precisely accurate forecast by the SCPA.  Prior forecasts are contained in table below:

The probability is now 50%:

  • That the indices will increase by 23% from their 2020 lows during their relief rallies
  • That the high for the relief rallies has occurred 

SCPA’s April forecasts and probabilities:

  • 100%- relief rally will peak by April 8, 2020
  • 100%- 2020 low will be breached by April 30, 2020

SCPA’s long term 100% probability forecast is for all eight of the global indices to bottom between September and November of 2022.  The probability is 100% for the markets of the countries to decline by a minimum of 79% below their 2020 highs and 50% for 89% below 2020 highs.  

Everyone should take advantage of the Bear market rally that is currently underway to GET OUT OF THE MARKET!   The bear who has arrived could potentially be more vicious than the 1929 bear market.

Since the indices have all rallied to within 18% to 27% of their 2020 highs, buy and hold investors and advisors should give serious consideration to take advantage of any rallies to liquidate holdings.  The Bull & Bear Tracker, which is a trend trading algorithm, could be utilized to quickly recoup losses of 30% for investments that are liquidated and also any capital gains taxes that might be owed.  

The Bull & Bear Tracker’s average gain has been above 5% per month since July of 2019.   Since its first signal was published on April 9, 2018, and through the end of February 2020, the gain was 77.3% vs. 14.9% for the S&P 500.  The Bull & Bear Tracker is projecting double digit gains for March 2020 while the S&P 500 will most likely have double digit losses.   For more about the Bull & Bear Tracker’s performance go to https://bullbeartracker.com/news/.

An investor can only allocate capital to be traded by the Bull & Bear Tracker though an approved registered investment advisor.  The investment advisor could also be utilized for an investor to get the maximum proceeds from liquidating their investments.

Michael Markowski: Why You Should Sell The “Bear Market Rally.”

Michael Markowski has been involved in the Capital Markets since 1977. He spent the first 15 years of his career in the Financial Services Industry as a Stockbroker, Portfolio Manager, Venture Capitalist, Investment Banker and Analyst. Since 1996 Markowski has been involved in the Financial Information Industry and has produced research, information and products that have been used by investors to increase their performance and reduce their risk. Read more at BullsNBears.com


The statistical crash probability analysis (SCPA) algorithm’s forecast for an interim market bottom to occur on March 23, 2020, was precisely accurate.  It was the algo’s third consecutive precise major global markets call for March of 2020.

The day after the “Probability is 87% that market is at interim bottom” article was published on March 23, 2020, the Dow Jones Industrials composite index rallied by 11.4%, its biggest one day percentage increase since 1933.  Additionally, Canada’s TSE index set an all-time record with a gain of 12.7%. Below are the gains for all of the global stock indices in the article.

According to the SCPA in the articles below the indices were forecasted to decline by 34% from their 2020 highs by March 21, 2020.

As of March 23, 2020, six of the indices had declined by more than 34%! 

The SCPA now says that the probability is 100% that the indices will rally by 18% off of the lows.  The probability is 50% that the indices could increase by 23% from their lows.

Everyone should take advantage of the Bear market rally that is currently underway to GET OUT OF THE MARKET!   The bear that has arrived could potentially be more vicious than the 1929 bear.  

SCPA’s April forecasts:

  • 100%- relief rally will peak by April 8, 2020
  • 100%- 2020 low will be breached by April 30, 2020

SCPA’s long term forecast is for all eight of the global indices to bottom between September and November of 2022.  At the bottom the minimum decline will be 79% below the 2020 highs.

Since the indices have all rallied to within 30% of their 2020 highs, buy and hold investors and advisors should give serious consideration to take advantage of any rallies to liquidate holdings.  The Bull & Bear Tracker, which is a trend trading algorithm, could be utilized to quickly recoup losses of 30% for investments that are liquidated and also any capital gains taxes that might be owed.  

The Bull & Bear Tracker’s average gain has been above 5% per month since July of 2019.   Since its first signal was published on April 9, 2018, and through the end of February 2020, the gain was 77.3% vs. 14.9% for the S&P 500.  The Bull & Bear Tracker is projecting double digit gains for March 2020 while the S&P 500 will most likely have double digit losses.   For more about the Bull & Bear Tracker’s performance go to https://bullbeartracker.com/news/.

An investor can only allocate capital to be traded by the Bull & Bear Tracker though an approved registered investment advisor.  The investment advisor could also be utilized for an investor to get the maximum proceeds from liquidating their investments.

 

TPA Analytics: Not All Pieces In Place For A Sustained Rally

Jeffrey Marcus is the President of Turning Point Analytics. Turning Point Analytics utilizes a time-tested, real world strategy that optimizes client’s entry and exit points and adds alpha. TPA defines each stock as Trend or Range to identify actionable inflection points. For more information on TPA check out: http://www.TurningPointAnalyticsllc.com


Michael Markowski: 87% Probability The Markets At An Interim Bottom

Michael Markowski has been involved in the Capital Markets since 1977. He spent the first 15 years of his career in the Financial Services Industry as a Stockbroker, Portfolio Manager, Venture Capitalist, Investment Banker and Analyst. Since 1996 Markowski has been involved in the Financial Information Industry and has produced research, information and products that have been used by investors to increase their performance and reduce their risk. Read more at BullsNBears.com


 

Based on my crash statistical probability analysis the probability is 87.5% that the stock markets of the US and the five other leading developed countries, which have been crashing since February 20, 2020, have reached an interim bottom.  

If the interim bottom has been made the statistical probability is 100% that the stock markets of the US, Japan, Germany, Canada, South Korea and France will experience powerful interim rallies that will result in double digit percentage gains as compared to their 2020 lows.  This will occur within days of the interim low being made. What will likely drive the rallies for all of the markets before they reverse to plumb to new lows is the US Congress passing a virus stimulus plan. A deceleration of the growth rate of new Coronavirus cases could also result in a quick and powerful relief rally.   

The probabilities and percentage increase targets in the above paragraphs were derived from my crash statistical probability analysis.  The analysis was explained in two of my recent articles which warned my readers to get out of the market.  As of March 23, 2020, the S&P had declined by 26% as compared to its closing price at March 6, 2020:

US Stock Market to decline by another 22% by Easter”, March 6, 2020

 “2020 Crash is third ‘Category 5 Hurricane’ in 90 years! Get out of market today!”, March 9, 2020

The new 2020 low made by the S&P 500 for today, March 23rd was poignant and increased the probability from 75% to 87.5% that the markets are near their interim bottoms.  It’s because the S&P 500 broke through the crash probability analysis’s 34% correction threshold. My articles of March 6th and March 9th explained the threshold’s significance.  The articles also made two very precise predictions for the markets of the crash inflicted countries that were relative to the threshold:  

  • 34% declines from their 2020 highs
  • declines to occur by March 21, 2020

When the predictions were published on March 6th, the corrections from their 2020 highs had ranged from 11% to 17%.  By March 18th, an index for each of the six countries had declined to or through the 34% threshold. South Korea and France were added after both of the articles were published.  However, two of the US’ indices, the S&P 500 had not corrected by 34%. The S&P 500 breached the threshold as of today (3/23/20) and got to 35.4% below its 2020 high. The NASDAQ’s correction from its 2020 high is at 33.0%.

Upon the markets for the countries reaching their initial post-crash highs the probability is also 100% that they will then reverse and then decline by 52% from their 2020 highs.  The steep declines to lower lows will occur by April 30, 2020. 

My ability to make such precise and accurate predictions is from my experience at conducting empirical research on extreme market anomalies that I have witnessed throughout my 42-year career.  The findings from my research are used to develop and power predictive algorithms which are utilized to predict similar extreme events in the future. The table below contains my algorithms which protect investors and enable them to make money in volatile and bear markets.

If it is not already, the 2020 crash will be recognized by historians as the most infamous stock market crash.  It’s the grand-daddy of all market crashes. The markets of more than one country beginning their crashes simultaneously after reaching all-time highs, then beginning their crashes the very next day is unprecedented.  The markets of three countries, Germany, Canada and the US reached all time highs on February 19, 2020. They then began their violent corrections that became crashes on February 20th, the very next day.

Since February 28th I have been working 18 hours a day to conduct empirical research on the five most infamous US stock market crashes listed in the table below.  My efforts yielded a significant breakthrough. The two crashes, which were by far the most lethal, 1929 and 2000 had the same genealogy as the crashes that have been underway for the six developed countries since February 20, 2020. The history for the two crashes was virtually identical   For example, the Crash of 1929 bottomed after 32 months and the NASDAQ 2000 bottomed after 31 months.

Based on my ongoing empirical research efforts regarding these same six countries, the statistical probability is 100% for the following events:  

  • The markets will have declined by a minimum of 79% when they bottom.  
  • The markets will bottom in fourth quarter of 2022.
  • It will take at least 15 years for the markets to return to their 2020 highs.  

My follow on article dated March 9th “2020 Crash is third ‘Category 5 Hurricane’ in 90 years! Get out of market today!”, was about the 2020 crash being equivalent to a “Category 5” designation which is assigned to only the most intense hurricanes.  To elaborate on this article, the discovery of the genealogy, statistical probabilities and pathology to identify lethal market crashes are analogous to a hurricane’s genealogy, statistical probabilities and pathology.

Unlike the stock market which has 100 years of available data, the ability to conduct empirical research on hurricanes only became available after the first plane few into the eye of a hurricane in 1943 to collect its barometric pressure.   Since then, the forecasting of hurricanes has become increasingly accurate. The intensity, geographical location and arrival times for a hurricane are very predictable. The result has been a significant reduction in hurricane fatalities.

The same forecasting can now be done for market crashes.  Instead of comparing barometric pressure readings, the Statistical Probability Analysis measures the degree of price volatility for market corrections which have the potential to become devastating crashes.   For a market to have the same genealogy as the 1929, 2000 and 2020 crashes, it must reach a specified percentage decline threshold within a consecutive-daily-declines period.   

The chart below covers four NASDAQ crashes.  The 2000 and 2020 category 5s experienced minimum corrections of 10% within days of their all-time highs.   The 2018 crash is not a Category 5 since its initial decline was less than 10%. Finally, the 2008 crash unlike the other three, did not occur after an all-time new high.  The NASDAQ and the S&P 500 peaked in October 2007.

The chart patterns for the indices of the five other countries including Japan, Canada, South Korea and France from February 19th to February 28th are almost identical.  The patterns for the Dow 1929 and the NASDAQ 2000 indices for the week to 10-day periods prior to their corrections becoming crashes were eerily similar.   

Deep research into the post-crash-to-the-final-bottom history for the 1929 and 2000 crashes enabled the identification of shared statistical probabilities and patterns.   The findings were then utilized to develop the indicated pathology for crashes of 1929, 2000 and 2020 as well as the projected pathology for all future crashes which have the same genealogy.  

The pathology and statistical probability analyses are now in the process to be programmed as crash tracking and post event forecasting algorithm.  The algorithm will monitor all markets which are ripe for a crash. It will automatically issue get-out-of-market warnings for future crashes. Finally, and most importantly, the crash tracking algorithm will forecast the following events and additional events as they unfold organically and after a crash has commenced:    

  • Interim low date range and target: enable those with cash to buy the market at the low and sell at the interim high before market reverses to make its final bottom 
  • Interim high date range and target: enables those who did not get out to sell out at higher prices 
  • final bottom and date range for final bottom:  enables long term by and hold investors to invest in something else while waiting for a bottom and reduces risk of buying prematurely and before bottom occurs 
  • number of years for a market that has endured a devastating crash to exceed pre-crash all-time high  

We are currently working as fast as we can to get a website developed for the algorithm. The event forecasts for the 2020 crashes needs to be available to all investors as soon as possible. My fear is that the declines for the markets of these six countries could happen much faster and be much deeper than the 1929 and 2000 crashes.  The probability of the first worldwide economic depression ever could occur.   

In the meantime, it is highly recommended that investors immediately engage a registered investment advisor (RIA) to assist in liquidating securities at the highest prices.  This will enable losses to be minimized. Time is of the essence. Many of the stock market’s biggest spikes over the past 100 years have occurred after crashes and at the beginning of secular bear markets.  

Major Market Buy/Sell Review: 03-23-20

HOW TO READ THE CHARTS

There are three primary components to each chart:

  • The price chart is in orange
  • The Over Bought/Over Sold indicator is in gray
  • The Buy / Sell indicator is in blue.

When the gray indicator is at the TOP of the chart, there is typically more risk and less reward available at the current time. In other words, the best time to BUY is when the short-term condition is over-sold. Likewise when the buy/sell indicator is above the ZERO line investments have a tendency of working better than when below the zero line.

With this basic tutorial let’s review the major markets.

S&P 500 Index

  • Last week: “With the market now 3-standard deviations oversold, a bounce is likely next week as it is expected the Fed will cut rates and restart a substantial QE program. A retracement to the 31.8%, 50%, 62.8% levels are possible and each level should be used to reduce equity risk and hedge.”
  • Well, no bounce this week, and markets are even more extended and deviated the previously.
  • Again, we suspect a bounce is likely from such extreme moves, but a retest of lows likely before this over. 
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: Hold position
    • This Week: No position
    • Stop-loss set at $250
    • Long-Term Positioning: Bearish

Dow Jones Industrial Average

  • The same situation exists with DIA.
  • DIA is on a very deep “Sell signal” so rallies will most likely fail in the weeks ahead. All stops have been triggered on trading positions.
  • A bounce is still likely, stops reset at recent lows.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: Hold current positions
    • This Week: No positions.
    • Stop-loss set at $190
  • Long-Term Positioning: Bearish

Nasdaq Composite

  • QQQ tested and violated its bullish trend line, is now on a deep “sell signal.” This suggests that rallies will likely fail for the time being. 
  • The index is very oversold, so a reflexive rally back to $190-195 is possible. which coincides with the 200-dma, 
  • Trading positions only with stops at recent lows.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: Hold position
    • This Week: No positions
    • Stop-loss set at $170
  • Long-Term Positioning: Bearish due to valuations

S&P 600 Index (Small-Cap)

  • As noted in our portfolio commentary, we sold our small-cap positions 5-weeks ago.
  • Small-caps are extremely oversold, and on a very deep “sell signal.”  
  • This particular group of stocks are the most susceptible to an economic slowdown from the virus. Use any reflexive rally to step-aside for the time being.
  • You can deploy a trading position in small-caps for a bounce, but they are underperforming large cap, so I am not sure its worth the risk.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No positions
    • This Week: No positions.
    • Stop loss adjusted to $42 on trading positions.
  • Long-Term Positioning: Bearish

S&P 400 Index (Mid-Cap)

  • As with Small-cap, we have no holdings. 
  • MDY is oversold, and is on a very deep a “sell signal.”
  • MDY has broken all critical supports, and like SLY, there is no reason to “buy” the sector currently. However, MDY is oversold enough for a counter-trend bounce to sell into. Trading positions only. 
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No holding
    • This Week: No holding
  • Long-Term Positioning: Bearish

Emerging Markets

  • Last week: “EEM has completed a “head and shoulders” topping pattern and violated support at the 61.8% retracement level. EEM will eventually test previous lows particularly with a sell signal now registered.” 
  • EEM is very now extremely oversold and on a deep sell-signal.
  • Use counter-trend rallies to sell into. Trading positions only. 
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No position
    • This Week: No position.
    • Stop-loss set at $30 for trading positions.
  • Long-Term Positioning: Bearish

International Markets

  • Like EEM, EFA was also sold previously. as we return our focus back to large cap value.
  • EFA is very sold and on a deep sell signal. A reflexive rally is likely back to $58 to 63 which doesn’t even get you back to the 200-dma. Use those levels to sell into.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No position.
    • This Week: No position.
    • Stop-loss set at $46 for trading positions.
  • Long-Term Positioning: Bearish

West Texas Intermediate Crude (Oil)

  • As noted last week: “We just didn’t realize how bad it would get until Saudi Arabia decided to launch a price war, thankfully, we had recommended selling all energy holdings on the Friday before that announcement.”
  • We still like the sector from a “value” perspective and expect that we will wind up making a lot of money here. We clearly aren’t at lows yet, so be patient. 
  • Short-Term Positioning: Bearish
    • Last Week: No positions
    • This Week: No positions.
    • Stops Triggered for any direct crude oil positions.
  • Long-Term Positioning: Bearish

Gold

  • Last week we noted: “Gold had been holding up well as a hedge until this past week where two hedge funds (we suspect Citadel and Millennium) blew up creating margin liquidation across all asset classes included gold, bonds, and even bitcoin.” 
  • It seems that liquidation event may be passing. If Gold can climb back above the 200-dma we will look to add back our holdings.
  • We also added a small position to GDX this past week, as the previous liquidation left a lot of value in the sector. 
  • Short-Term Positioning: Bullish
    • Last week: Hold positions.
    • This week: Look to add above $140.
    • Stop-loss set at $137.50.
    • Long-Term Positioning: Bullish

Bonds (Inverse Of Interest Rates)

  • As noted last week: “We previously sold our small position in TLT, and this past week reduced our IEF position by 50% and increased BIL accordingly to shorten duration. The rest of our bond holdings have done the work of supporting the portfolio.” 
  • The margin liquidation event is now bringing bonds back to a “buyable” range and bonds did hold support at the previous market highs. 
  • We remain very cautious on our bond exposure currently, and will look to add to that exposure once the credit markets calm down a bit. 
  • Short-Term Positioning: Neutral
    • Last Week: Hold positions
    • This Week: Sold bond mutual funds, added position of STIP.
    • Stop-loss is moved up to $147.50
    • Long-Term Positioning: Bullish

U.S. Dollar

  • Three weeks ago we stated: “This past week, the dollar surged through that resistance and is now extremely overbought short-term. Looking for a reflexive rally in stocks next week that pulls the dollar back towards the breakout level of last week.
  • The credit crisis, and rush to cash, has sent the dollar surging to 7-deviations above the mean. As the credit markets calm down we should see relationship between asset classes return to normal. 
  • The dollar has reversed its sell signal, which suggests dollar strength may be with us for a while longer.

Everyone Wanting To Buy Suggests The Bear Still Prowls (Full Report)


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Everyone Wanting To Buy Suggests The Bear Still Prowls

“If you own 10% equities, as we do, and the market falls 100%, you will lose 10%. That said, you have 90 cents on the dollar to buy equities for free.” – Michael Lebowitz

Let me explain his comment.

Last week, we wrote a piece titled: Risk Limits Hit. When Too Little Is Too Much in which we discussed reducing our equity risk to our lowest levels. 

For the last several months, we have been issuing repeated warnings about the market. While such comments are often mistaken for “being bearish,” we have often stated it is our process of managing “risk,” which is most important.

Beginning in mid-January, we began taking profits out of our portfolios and reducing risk. To wit:

‘On Friday, we began the orderly process of reducing exposure in our portfolios to take in profits, reduce portfolio risk, and raise cash levels.’

Importantly, we did not ‘sell everything’ and go to cash.

Since then, we took profits and rebalanced risk again in late January and early February as well.

On Friday/Monday, our ‘limits’ were breached, which required us to sell more.”

There are a couple of important things to understand about our current equity exposure. 

To begin with, we never go to 100% cash. The reason is that “psychologically” it is too difficult for clients to start “buying” when the market finally bottoms. Seeing the market begin to recover, along with their portfolio, makes it easier to fight the fear the market is “going to zero.”

Secondly, and most importantly, at just 10% in current equity exposure, the market could literally fall 100% and our portfolios would only decline by 10%. (Of course, given we still have 90% of our capital left, we can buy a tremendous amount of “free assets.”)

Of course, the market isn’t going to zero.

However, let’s map out a more realistic example. 

In this week’s MacroView, we discussed the “valuation” issue

“If our, and Mr. Rosenberg’s, estimates are correct of a 5-8% recessionary drag in the second quarter of 2020, then an average reduction in earnings of 30% is most likely overly optimistic. 

However, here is the math:

  • Current Earnings = 132.90
  • 30% Reduction = $100 (rounding down for easier math)

At various P/E multiples, we can predict where “fair value” for the market is based on historical assumptions:

  • 20x earnings:  Historically high but markets have traded at high valuations for the last decade. 
  • 18x earnings: Still historically high.
  • 15x earnings: Long-Term Average
  • 13x earnings: Undervalued 
  • 10x earnings: Extremely undervalued but aligned with secular bear market bottoms.

You can pick your own level where you think P/E’s will account for the global recession but the chart below prices it into the market.”

So, let’s assume our numbers are optimistically in the “ballpark” of a valuation reversion, and earnings are only cut by 30% while the market bottoms at 1800, or 18x earnings. (I say optimistically because normal valuation reversions are 15x earnings or less.)

Here’s the math:

  • For a “buy and hold” investor (who is already down 20-30% from the peak) will lose an additional 22%. 
  • For a client with 10% equity exposure, they will lose an additional 2.2%. 

When the market does eventually bottom, and it will, it will be far easier for our clients to recover 10% of their portfolio versus 50% for most “buy and hold” strategies. 

As we have often stated, “getting back to even is not an investment strategy.”  

Is The Bear Market Over?

This is THE QUESTION for investors. Here are a few articles from the past couple of days:

And then you have clueless economists, like Brian Wesbury from First Trust, who have never seen a “bear market,” or “recession,” until it’s over.

March 6th.

Why is this important? Because “bear markets don’t bottom with optimism, they end with despair.”

As I wrote last week:

“Bob Farrell, a legendary investor, is famous for his 10-Investment Rules to follow.

Bear markets have three stages – sharp down, reflexive rebound and a drawn-out fundamental downtrend – Rule #8

  1. Bear markets often START with a sharp and swift decline.
  2. After this decline, there is an oversold bounce that retraces a portion of that decline.
  3. The longer-term decline then continues, at a slower and more grinding pace, as the fundamentals deteriorate.

Dow Theory also suggests that bear markets consist of three down legs with reflexive rebounds in between.

The chart above shows the stages of the last two primary cyclical bear markets versus today (the 2020 scale has been adjusted to match.)

The answer to the question is simply this:

“When is it time to start buying the market? When you do NOT want to.”

Bond Market Implosion

At the moment, the Federal Reserve is fighting a potentially losing battle – the bond market. 

  • After cutting rates to zero and launching QE of $700 billion – the markets crashed. 
  • The ECB starts an $800 billion QE program, and the markets fail to move. 
  • The Fed injected liquidity into money markets, the credit market, and is buying municipal bonds. 
  • And the market crashed more. 

The Fed has literally turned on a “garden hose” to extinguish a literal “bon(d)fire.” 

This was no more evident than their action this past week to revive a program from the financial crisis called the Primary Dealer Credit Facility (PDCF) to bailout hedge funds and banks. Via Mike Witney:

The Fed is reopening its most controversial and despised crisis-era bailout facility, the Primary Dealer Credit Facility. The facility’s real purpose is to transfer the toxic bonds and securities from failing financial institutions and corporations (through an intermediary) onto the Fed’s balance sheet.

The objective of this sleight of hand is to recapitalize big investors who, through their own bad bets, are now either underwater or in deep trouble. Just like 2008, the Fed is now doing everything in its power to save its friends and mop up the ocean of red ink that was generated during the 10-year orgy of speculation that has ended in crashing markets and a wave of deflation. Check out this excerpt from an article at Wall Street on Parade. Here’s an excerpt:

“Veterans on Wall Street think of the PDCF as the cash-for-trash facility, where Wall Street’s toxic waste from a decade of irresponsible trading and lending, will be purged from the balance sheets of the Wall Street firms and handed over to the balance sheet of the Federal Reserve – just as it was during the last financial crisis on Wall Street.”

– (“Fed Announces Program for Wall Street Banks to Pledge Plunging Stocks to Get Trillions in Loans at ¼ Percent Interest” Wall Street on Parade)

In other words, the PDCF is a landfill for distressed assets that have lost much of their value and for which there is little or no demand. And, as bad as that sounds, the details about the resuscitated PDCF are much worse.”

If you have any doubt how bad it is in the bond market, just take a look at what happened to both investment grade and junk bond spreads. (Charts courtesy of David Rosenberg)

As they say: “That clearly ain’t normal.” 

More importantly, the “Bear Market” won’t be over until the credit markets get fixed.

Hunting The Bear

It was a pretty stunning week in the market. Over the last 5-days, the market declined an astonishing, or should I say breathtaking, 15%. The last time we saw a one week decline of that magnitude was during the “Lehman” crisis. (Of course, with hedge funds blowing up all week, this is precisely what the Fed has been bailing out.)

Since the peak of the market at the end of February, the market is now down a whopping 32%.

Surely, we are close to a bottom?

Let’s revisit our daily and weekly charts for some clues as to where we are, what could happen next, and what actions to take.

On a daily basis, the market is extremely stretched and deviated to the downside. Friday’s selloff smacked of an “Oriental Rug Company” where it was an “Everything Must Go Liquidation Event.” 

Remember all those headlines from early this year:

Well….

This selloff completely reversed the entire advance from the 2018 lows. That’s the bad news.

The good news is the markets are now more extremely oversold on a variety of measures than at just about any other point in history. 

Such a reversal, particularly given the “speed and magnitude” of the decline, argues for a “reversal” of some sort. 

Warning: Any reversal will NOT BE the bear market bottom. It will be a “bear market” rally you will want to “sell” into. The reason is there are still many investors trapped in “buy and hold” and “passive indexing” strategies which are actively seeking an exit. Any rallies will be met with redemptions.

As noted above, bear markets do not end with investors wanting to “buy” the market. They end when “everyone wants to sell.” 

And, NO, investors are “not different this time.” 

This “bear market” rally scenario becomes more evident when we view our longer-term weekly “sell signals.”  As we warned last week:

“With all of our signals now triggered from fairly high levels, it suggests the current selloff is not over as of yet. In other words, we will see a rally, followed by a secondary failure to lower lows, before the ultimate bottom is put in.” 

Unfortunately, we have yet to see any attempt at a sustained rally. 

More importantly, with the failure of the markets to hold lows this week, both of our long-term weekly “sell signals” have now been triggered. Such would suggest that a rally back to the “bullish trend line” from 2009 will likely be the best opportunity to “sell” before the “bear market” finds its final low.

Where will that low likely be:

Let’s update our mapping from last week:

  1. A retest of current lows that holds is a 27% decline. – Failed
  2. A retest of the 2018 lows, which is most likely, an average recessionary decline of 32.8% – Current
  3. A retest of the 2016 lows, coincident with a “credit event,” would entail a 50.9% decline.  – Pending Possibility.

Given the magnitude, and multiple confirmations, of these signals, it is far too soon to assume the “bear market” is over. This is particularly the case, given the selloff is less than one-month old.

Bear markets, and recessions, tend to last 18-months on average.

The current bear market and recession are not the result of just the “coronavirus” shock. It is the result of many simultaneous shocks from:

  • Economic disruption
  • Surging unemployment
  • Oil price shock
  • Collapsing consumer confidence, and
  • A “credit event.”

We likely have more to go before we can safely assume we have turned the corner.

In the meantime, use rallies to raise cash. Don’t worry about trying to “buy the bottom.” There will be plenty of time to see “THE” bottom is in, and having cash will allow you to “buy stocks” from the last of the “weak hands.” 


The MacroView

If you need help or have questions, we are always glad to help. Just email me.

See You Next Week

By Lance Roberts, CIO


Market & Sector Analysis

Data Analysis Of The Market & Sectors For Traders


S&P 500 Tear Sheet  


Performance Analysis


Technical Composite

Note: The technical gauge is now at the lowest level since both the “Dot.com” and “Financial Crisis.” However, note the gauge bottoms BEFORE the market bottoms. In 2002, lows were retested. In 2008, there was an additional 22% decline into early 2009.


ETF Model Relative Performance Analysis


Sector & Market Analysis:

Be sure and catch our updates on Major Markets (Monday) and Major Sectors (Tuesday) with updated buy/stop/sell levels

Sector-by-Sector

For the 3rd week in a row:

“Everything was crushed again this past week, so the difference between leading and lagging sectors is which sector fell faster or slower than the S&P 500 index itself.” 

Improving – Discretionary (XLY), and Real Estate (XLRE)

We previously reduced our weightings to Real Estate and liquidated Discretionary entirely over concerns of the virus and impact to the economy. No change this week. 

Current Positions: 1.2 weight XLRE

Outperforming – Technology (XLK), Communications (XLC), Staples (XLP), Healthcare (XLV), and Utilities (XLU)

The correction in Technology last week broke support at the 200-dma but finished the week very close to the May 2019 lows. Communication and Utilities didn’t perform as well but also held up better during the decline on a relative basis. The same is true for Utilities and Staples. These are our core ETF’s right now at which we are carrying substantially reduced exposure.

Current Positions: 1/2 weight XLK, XLC, XLU, XLP, XLV

Weakening – None

No sectors in this quadrant.

Current Position: None

Lagging – Industrials (XLI), Financials (XLF), Materials (XLB), and Energy (XLE)

No change from last week, with the exception that performance continued to be worse than the overall market.

These sectors are THE most sensitive to Fed actions (XLF) and the shutdown of the economy. We eliminated all holdings in late February and early March. 

Current Position: None

Market By Market

Small-Cap (SLY) and Mid Cap (MDY) – Three weeks ago, we sold all small-cap and mid-cap exposure over concerns of the impact of the coronavirus. Remain out of these sectors for now. 

Current Position: None

Emerging, International (EEM) & Total International Markets (EFA)

Same as small-cap and mid-cap. Given the spread of the virus and the impact on the global supply chain. Trading opportunities only. 

Current Position: None

S&P 500 Index (Core Holding) – Given the rapid deterioration of the broad market, we sold our entire core position holdings for the safety of cash.

Current Position: None

Gold (GLD) – Gold broke our stop, and we sold our holdings. We are now on the watch for an entry point if Gold can climb back above the 200-dma. 

Current Position: None

Bonds (TLT) –

Bonds collapsed last week as the “credit event” we have been concerned about took shape. We had previously taken profits and reduced our bond holdings duration and increased credit quality. We have now reduced our total bond exposure to 20% of the portfolio from 40% since we are only carrying 10% equity currently. (Rebalanced our hedge.) 

Current Positions: SHY, IEF, BIL

Sector / Market Recommendations

The table below shows thoughts on specific actions related to the current market environment.

(These are not recommendations or solicitations to take any action. This is for informational purposes only related to market extremes and contrarian positioning within portfolios. Use at your own risk and peril.)

Portfolio/Client Update:

I know it is ugly. 

The S&P 500 is down nearly 32% in just three weeks. 

That’s scary.

However, it is important to keep some perspective on where we are currently. 

Last Monday, we further reduced our equity to just 10% (from 25% previously) of the portfolio

What does that mean?  Here is some math:

If the market goes to ZERO from here, (it’s not going to) your MAXIMUM loss is just 10%.

This is recoverable, particularly if we could buy a portfolio of assets for FREE.

We currently expect a maximum decline from current levels of 20%. This would be a 2% net hit to portfolios leaving us with a LOT of cash to buy distressed assets at 50% off. 

This is the opportunity we have been waiting for during the entire last decade.

Currently, we are busy rebuilding all of our portfolio models, rethinking risk management in a post-bear market environment, and what role the future of “fixed income” will play in asset allocations.

These are all essential questions that we need solid answers for.

We are in an excellent position with plenty of cash, reduced bond holdings, and minimal equity exposure in companies we want to own for the next 10-years. We are just patiently waiting to buy large chunks of these holdings soon with both stable and higher yields. 

Let me assure you of four things;

  1. The ONLY people who care more about your money than you, is all of us at RIA Advisors.
  2. We will NOT “buy the bottom” of the market. We will buy when we SEE the bottom of the market is in and risk/reward ratios are clearly in our favor. 
  3. This has been THE fastest bear market in history. We are doing our best to preserve your capital so that you meet your financial goals. Bear markets are never fun, but they are necessary for future gains. 
  4. We’ve got this.

Please don’t hesitate to contact us if you have any questions, or concerns. 

Lance Roberts

CIO


THE REAL 401k PLAN MANAGER

A Conservative Strategy For Long-Term Investors


Model performance is based on a two-asset model of stocks and bonds relative to the weighting changes made each week in the newsletter. This is strictly for informational and educational purposes only and should not be relied upon for any reason. Past performance is not a guarantee of future results. Use at your own risk and peril.

401k Plan Manager Live Model

As an RIA PRO subscriber (You get your first 30-days free) you have access to our live 401k p

The code will give you access to the entire site during the 401k-BETA testing process, so not only will you get to help us work out the bugs on the 401k plan manager, you can submit your comments about the rest of the site as well.

We are building models specific to company plans. So, if you would like to see your company plan included specifically, send me the following:

  • Name of the company
  • Plan Sponsor
  • A print out of your plan choices. (Fund Symbol and Fund Name)

If you would like to offer our service to your employees at a deeply discounted corporate rate, please contact me.

Everyone Wanting To Buy Suggests The Bear Still Prowls


  • Everyone Wanting To Buy Suggests The Bear Still Prowls
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Catch Up On What You Missed Last Week


Everyone Wanting To Buy Suggests The Bear Still Prowls

“If you own 10% equities, as we do, and the market falls 100%, you will lose 10%. That said, you have 90 cents on the dollar to buy equities for free.” – Michael Lebowitz

Let me explain his comment.

Last week, we wrote a piece titled: Risk Limits Hit. When Too Little Is Too Much in which we discussed reducing our equity risk to our lowest levels. 

For the last several months, we have been issuing repeated warnings about the market. While such comments are often mistaken for “being bearish,” we have often stated it is our process of managing “risk,” which is most important.

Beginning in mid-January, we began taking profits out of our portfolios and reducing risk. To wit:

‘On Friday, we began the orderly process of reducing exposure in our portfolios to take in profits, reduce portfolio risk, and raise cash levels.’

Importantly, we did not ‘sell everything’ and go to cash.

Since then, we took profits and rebalanced risk again in late January and early February as well.

On Friday/Monday, our ‘limits’ were breached, which required us to sell more.”

There are a couple of important things to understand about our current equity exposure. 

To begin with, we never go to 100% cash. The reason is that “psychologically” it is too difficult for clients to start “buying” when the market finally bottoms. Seeing the market begin to recover, along with their portfolio, makes it easier to fight the fear the market is “going to zero.”

Secondly, and most importantly, at just 10% in current equity exposure, the market could literally fall 100% and our portfolios would only decline by 10%. (Of course, given we still have 90% of our capital left, we can buy a tremendous amount of “free assets.”)

Of course, the market isn’t going to zero.

However, let’s map out a more realistic example. 

In this week’s MacroView, we discussed the “valuation” issue

“If our, and Mr. Rosenberg’s, estimates are correct of a 5-8% recessionary drag in the second quarter of 2020, then an average reduction in earnings of 30% is most likely overly optimistic. 

However, here is the math:

  • Current Earnings = 132.90
  • 30% Reduction = $100 (rounding down for easier math)

At various P/E multiples, we can predict where “fair value” for the market is based on historical assumptions:

  • 20x earnings:  Historically high but markets have traded at high valuations for the last decade. 
  • 18x earnings: Still historically high.
  • 15x earnings: Long-Term Average
  • 13x earnings: Undervalued 
  • 10x earnings: Extremely undervalued but aligned with secular bear market bottoms.

You can pick your own level where you think P/E’s will account for the global recession but the chart below prices it into the market.”

So, let’s assume our numbers are optimistically in the “ballpark” of a valuation reversion, and earnings are only cut by 30% while the market bottoms at 1800, or 18x earnings. (I say optimistically because normal valuation reversions are 15x earnings or less.)

Here’s the math:

  • For a “buy and hold” investor (who is already down 20-30% from the peak) will lose an additional 22%. 
  • For a client with 10% equity exposure, they will lose an additional 2.2%. 

When the market does eventually bottom, and it will, it will be far easier for our clients to recover 10% of their portfolio versus 50% for most “buy and hold” strategies. 

As we have often stated, “getting back to even is not an investment strategy.”  

Is The Bear Market Over?

This is THE QUESTION for investors. Here are a few articles from the past couple of days:

And then you have clueless economists, like Brian Wesbury from First Trust, who have never seen a “bear market,” or “recession,” until it’s over.

March 6th.

Why is this important? Because “bear markets don’t bottom with optimism, they end with despair.”

As I wrote last week:

“Bob Farrell, a legendary investor, is famous for his 10-Investment Rules to follow.

Bear markets have three stages – sharp down, reflexive rebound and a drawn-out fundamental downtrend – Rule #\8

  1. Bear markets often START with a sharp and swift decline.
  2. After this decline, there is an oversold bounce that retraces a portion of that decline.
  3. The longer-term decline then continues, at a slower and more grinding pace, as the fundamentals deteriorate.

Dow Theory also suggests that bear markets consist of three down legs with reflexive rebounds in between.

The chart above shows the stages of the last two primary cyclical bear markets versus today (the 2020 scale has been adjusted to match.)

The answer to the question is simply this:

“When is it time to start buying the market? When you do NOT want to.”

Bond Market Implosion

At the moment, the Federal Reserve is fighting a potentially losing battle – the bond market. 

  • After cutting rates to zero and launching QE of $700 billion – the markets crashed. 
  • The ECB starts an $800 billion QE program, and the markets fail to move. 
  • The Fed injected liquidity into money markets, the credit market, and is buying municipal bonds. 
  • And the market crashed more. 

The Fed has literally turned on a “garden hose” to extinguish a literal “bon(d)fire.” 

This was no more evident than their action this past week to revive a program from the financial crisis called the Primary Dealer Credit Facility (PDCF) to bailout hedge funds and banks. Via Mike Witney:

The Fed is reopening its most controversial and despised crisis-era bailout facility, the Primary Dealer Credit Facility. The facility’s real purpose is to transfer the toxic bonds and securities from failing financial institutions and corporations (through an intermediary) onto the Fed’s balance sheet.

The objective of this sleight of hand is to recapitalize big investors who, through their own bad bets, are now either underwater or in deep trouble. Just like 2008, the Fed is now doing everything in its power to save its friends and mop up the ocean of red ink that was generated during the 10-year orgy of speculation that has ended in crashing markets and a wave of deflation. Check out this excerpt from an article at Wall Street on Parade. Here’s an excerpt:

“Veterans on Wall Street think of the PDCF as the cash-for-trash facility, where Wall Street’s toxic waste from a decade of irresponsible trading and lending, will be purged from the balance sheets of the Wall Street firms and handed over to the balance sheet of the Federal Reserve – just as it was during the last financial crisis on Wall Street.”

– (“Fed Announces Program for Wall Street Banks to Pledge Plunging Stocks to Get Trillions in Loans at ¼ Percent Interest” Wall Street on Parade)

In other words, the PDCF is a landfill for distressed assets that have lost much of their value and for which there is little or no demand. And, as bad as that sounds, the details about the resuscitated PDCF are much worse.”

If you have any doubt how bad it is in the bond market, just take a look at what happened to both investment grade and junk bond spreads. (Charts courtesy of David Rosenberg)

As they say: “That clearly ain’t normal.” 

More importantly, the “Bear Market” won’t be over until the credit markets get fixed.

Hunting The Bear

It was a pretty stunning week in the market. Over the last 5-days, the market declined an astonishing, or should I say breathtaking, 15%. The last time we saw a one week decline of that magnitude was during the “Lehman” crisis. (Of course, with hedge funds blowing up all week, this is precisely what the Fed has been bailing out.)

Since the peak of the market at the end of February, the market is now down a whopping 32%.

Surely, we are close to a bottom?

Let’s revisit our daily and weekly charts for some clues as to where we are, what could happen next, and what actions to take.

On a daily basis, the market is extremely stretched and deviated to the downside. Friday’s selloff smacked of an “Oriental Rug Company” where it was an “Everything Must Go Liquidation Event.” 

Remember all those headlines from early this year:

Well….

This selloff completely reversed the entire advance from the 2018 lows. That’s the bad news.

The good news is the markets are now more extremely oversold on a variety of measures than at just about any other point in history. 

Such a reversal, particularly given the “speed and magnitude” of the decline, argues for a “reversal” of some sort. 

Warning: Any reversal will NOT BE the bear market bottom. It will be a “bear market” rally you will want to “sell” into. The reason is there are still many investors trapped in “buy and hold” and “passive indexing” strategies which are actively seeking an exit. Any rallies will be met with redemptions.

As noted above, bear markets do not end with investors wanting to “buy” the market. They end when “everyone wants to sell.” 

And, NO, investors are “not different this time.” 

This “bear market” rally scenario becomes more evident when we view our longer-term weekly “sell signals.”  As we warned last week:

“With all of our signals now triggered from fairly high levels, it suggests the current selloff is not over as of yet. In other words, we will see a rally, followed by a secondary failure to lower lows, before the ultimate bottom is put in.” 

Unfortunately, we have yet to see any attempt at a sustained rally. 

More importantly, with the failure of the markets to hold lows this week, both of our long-term weekly “sell signals” have now been triggered. Such would suggest that a rally back to the “bullish trend line” from 2009 will likely be the best opportunity to “sell” before the “bear market” finds its final low.

Where will that low likely be:

Let’s update our mapping from last week:

  1. A retest of current lows that holds is a 27% decline. – Failed
  2. A retest of the 2018 lows, which is most likely, an average recessionary decline of 32.8% – Current
  3. A retest of the 2016 lows, coincident with a “credit event,” would entail a 50.9% decline.  – Pending Possibility.

Given the magnitude, and multiple confirmations, of these signals, it is far too soon to assume the “bear market” is over. This is particularly the case, given the selloff is less than one-month old.

Bear markets, and recessions, tend to last 18-months on average.

The current bear market and recession are not the result of just the “coronavirus” shock. It is the result of many simultaneous shocks from:

  • Economic disruption
  • Surging unemployment
  • Oil price shock
  • Collapsing consumer confidence, and
  • A “credit event.”

We likely have more to go before we can safely assume we have turned the corner.

In the meantime, use rallies to raise cash. Don’t worry about trying to “buy the bottom.” There will be plenty of time to see “THE” bottom is in, and having cash will allow you to “buy stocks” from the last of the “weak hands.” 


The MacroView

If you need help or have questions, we are always glad to help. Just email me.

See You Next Week

By Lance Roberts, CIO


Market & Sector Analysis

Data Analysis Of The Market & Sectors For Traders


S&P 500 Tear Sheet  


Performance Analysis


Technical Composite

Note: The technical gauge is now at the lowest level since both the “Dot.com” and “Financial Crisis.” However, note the gauge bottoms BEFORE the market bottoms. In 2002, lows were retested. In 2008, there was an additional 22% decline into early 2009.


ETF Model Relative Performance Analysis


Sector & Market Analysis:

Be sure and catch our updates on Major Markets (Monday) and Major Sectors (Tuesday) with updated buy/stop/sell levels

Sector-by-Sector

For the 3rd week in a row:

“Everything was crushed again this past week, so the difference between leading and lagging sectors is which sector fell faster or slower than the S&P 500 index itself.” 

Improving – Discretionary (XLY), and Real Estate (XLRE)

We previously reduced our weightings to Real Estate and liquidated Discretionary entirely over concerns of the virus and impact to the economy. No change this week. 

Current Positions: 1.2 weight XLRE

Outperforming – Technology (XLK), Communications (XLC), Staples (XLP), Healthcare (XLV), and Utilities (XLU)

The correction in Technology last week broke support at the 200-dma but finished the week very close to the May 2019 lows. Communication and Utilities didn’t perform as well but also held up better during the decline on a relative basis. The same is true for Utilities and Staples. These are our core ETF’s right now at which we are carrying substantially reduced exposure.

Current Positions: 1/2 weight XLK, XLC, XLU, XLP, XLV

Weakening – None

No sectors in this quadrant.

Current Position: None

Lagging – Industrials (XLI), Financials (XLF), Materials (XLB), and Energy (XLE)

No change from last week, with the exception that performance continued to be worse than the overall market.

These sectors are THE most sensitive to Fed actions (XLF) and the shutdown of the economy. We eliminated all holdings in late February and early March. 

Current Position: None

Market By Market

Small-Cap (SLY) and Mid Cap (MDY) – Three weeks ago, we sold all small-cap and mid-cap exposure over concerns of the impact of the coronavirus. Remain out of these sectors for now. 

Current Position: None

Emerging, International (EEM) & Total International Markets (EFA)

Same as small-cap and mid-cap. Given the spread of the virus and the impact on the global supply chain. Trading opportunities only. 

Current Position: None

S&P 500 Index (Core Holding) – Given the rapid deterioration of the broad market, we sold our entire core position holdings for the safety of cash.

Current Position: None

Gold (GLD) – Gold broke our stop, and we sold our holdings. We are now on the watch for an entry point if Gold can climb back above the 200-dma. 

Current Position: None

Bonds (TLT) –

Bonds collapsed last week as the “credit event” we have been concerned about took shape. We had previously taken profits and reduced our bond holdings duration and increased credit quality. We have now reduced our total bond exposure to 20% of the portfolio from 40% since we are only carrying 10% equity currently. (Rebalanced our hedge.) 

Current Positions: SHY, IEF, BIL

Sector / Market Recommendations

The table below shows thoughts on specific actions related to the current market environment.

(These are not recommendations or solicitations to take any action. This is for informational purposes only related to market extremes and contrarian positioning within portfolios. Use at your own risk and peril.)

Portfolio/Client Update:

I know it is ugly. 

The S&P 500 is down nearly 32% in just three weeks. 

That’s scary.

However, it is important to keep some perspective on where we are currently. 

Last Monday, we further reduced our equity to just 10% (from 25% previously) of the portfolio

What does that mean?  Here is some math:

If the market goes to ZERO from here, (it’s not going to) your MAXIMUM loss is just 10%.

This is recoverable, particularly if we could buy a portfolio of assets for FREE.

We currently expect a maximum decline from current levels of 20%. This would be a 2% net hit to portfolios leaving us with a LOT of cash to buy distressed assets at 50% off. 

This is the opportunity we have been waiting for during the entire last decade.

Currently, we are busy rebuilding all of our portfolio models, rethinking risk management in a post-bear market environment, and what role the future of “fixed income” will play in asset allocations.

These are all essential questions that we need solid answers for.

We are in an excellent position with plenty of cash, reduced bond holdings, and minimal equity exposure in companies we want to own for the next 10-years. We are just patiently waiting to buy large chunks of these holdings soon with both stable and higher yields. 

Let me assure you of four things;

  1. The ONLY people who care more about your money than you, is all of us at RIA Advisors.
  2. We will NOT “buy the bottom” of the market. We will buy when we SEE the bottom of the market is in and risk/reward ratios are clearly in our favor. 
  3. This has been THE fastest bear market in history. We are doing our best to preserve your capital so that you meet your financial goals. Bear markets are never fun, but they are necessary for future gains. 
  4. We’ve got this.

Please don’t hesitate to contact us if you have any questions, or concerns. 

Lance Roberts

CIO


THE REAL 401k PLAN MANAGER

A Conservative Strategy For Long-Term Investors


Model performance is based on a two-asset model of stocks and bonds relative to the weighting changes made each week in the newsletter. This is strictly for informational and educational purposes only and should not be relied upon for any reason. Past performance is not a guarantee of future results. Use at your own risk and peril.

401k Plan Manager Live Model

As an RIA PRO subscriber (You get your first 30-days free) you have access to our live 401k p

The code will give you access to the entire site during the 401k-BETA testing process, so not only will you get to help us work out the bugs on the 401k plan manager, you can submit your comments about the rest of the site as well.

We are building models specific to company plans. So, if you would like to see your company plan included specifically, send me the following:

  • Name of the company
  • Plan Sponsor
  • A print out of your plan choices. (Fund Symbol and Fund Name)

If you would like to offer our service to your employees at a deeply discounted corporate rate, please contact me.

 

#WhatYouMissed On RIA This Week: 03-20-20

We know you get busy and don’t check our website as often as you might like. Plus, with so much content being pushed out every week from the RIA Team, we thought we would send you a weekly synopsis of everything you might have missed.

The Week In Blogs

________________________________________________________________________________

Our Latest Newsletter

________________________________________________________________________________

What You Missed At RIA Pro

RIA Pro is our premium investment analysis, research, and data service. (Click here to try it now and get 30-days free)

________________________________________________________________________________

The Best Of “The Lance Roberts Show

________________________________________________________________________________

Video Of The Week A

Michael Lebowitz, CFA and I dig into the financial markets, the Fed’s bailouts, and what potentially happens next and what we are looking for. (Also, our take on corporate bailouts, and why, I can’t believe I am saying this, we mostly agree with Elizabeth Warren.)

________________________________________________________________________________

Our Best Tweets Of The Week

See you next week!

Michael Markowski: Dip Buyers, Beware Of Sensational Headlines

Michael Markowski has been involved in the Capital Markets since 1977. He spent the first 15 years of his career in the Financial Services Industry as a Stockbroker, Portfolio Manager, Venture Capitalist, Investment Banker and Analyst. Since 1996 Markowski has been involved in the Financial Information Industry and has produced research, information and products that have been used by investors to increase their performance and reduce their risk.Read more at BullsNBears.com


Many investors are salivating to trade the dips in a stock market which is becoming increasingly more volatile.  It’s because Wall Street for the week ended March 13th according to the headlines had its worst week since 2008.  Its human nature to want to buy at fire sale prices.     

March 13, 2020 headline:

After Worst Week Since 2008, What’s Next For The Stock Market?” , Benzinga March 13, 2020 

Investors became conditioned to buy the dips after the record setting 2008 crash.  The S&P 500 made a quick recovery after crashing down by 40% within six months to its lowest level since 1996 after Lehman declared bankruptcy in September 2008.  

Those who jumped in the last time the markets had their worst week since 2008, the week ended February 28, 2020, lost 8.2% in 10 days based on the S&P 500’s March 13th close.   Secular bear markets are famous for producing one sensational headline after another as a market continues to reach new lows.        

February 28, 2020 headline:

Wall Street has worst week since 2008 as S&P 500 drops 11.5%”, Associated Press February 28, 2020

From September 12, 2008, the last market close prior to Lehman’s bankruptcy to the bottom of the 2000 to 2009 secular bear market which began in 2000 and ended on March 9, 2009:

  • Passive buy and hold investors lost 39%
  • bullish traders who precisely got in at all bottoms and sold at tops made 136.5%
  • bearish traders who precisely sold short at all tops and bought the shares back at all bottoms made 162.3%

What likely happened due to the extreme volatility as depicted in the chart below most non-professional traders lost money.   Buy and hold bargain hunters who bought during the first five months after the 2008 crash began lost a minimum of 20%. From February 9, 2009, which was five months after the decline began, to the March 9th final bottom the market declined by an additional 22%.

The table below reinforces the difficulties that anyone but a professional investor had to make money from the 2008 crash.  $100 traded from September 12th to March 2009, would have declined to $74.20 at the 2000 secular bear’s final bottom.

The current market is much riskier than the 2008 market for dip buying.  Instead of being at the bottom of secular bear, the chart below depicts that the S&P 500 has been in a secular bull market since 2009.  In my March 5th article when the S&P 500 was 10% higher included my prediction that the secular bull likely reached its all-time high on February 19, 2020 and the secular bear began the very next day on February 20, 2020.

Based on my recent empirical research findings from analyzing prior crashes which have similar traits as the crash of 2020, the probability is high that the decline from the top to the bottom will be from 79% to 89%.  The final bottom will be reached between October and December of 2022. 

BullsNBears.com which covers all of the emerging and declining economic and market trends is an excellent resource site.  Click here to view one-minute video about the site.   

Technically Speaking: Risk Limits Hit, When Too Little Is Too Much

For the last several months, we have been issuing repeated warnings about the market. While such comments are often mistaken for “being bearish,” we have often stated it is our process of managing “risk” which is most important.

Beginning in mid-January, we began taking profits out of our portfolios and reducing risk. To wit:

“On Friday, we began the orderly process of reducing exposure in our portfolios to take in profits, reduce portfolio risk, and raise cash levels.”

Importantly, we did not “sell everything” and go to cash.

Since then, we took profits and rebalanced risk again in late January and early February as well.

Our clients, their families, their financial and emotional “well being,” rest in our hands. We take that responsibility very seriously, and work closely with our clients to ensure that not only are they financially successful, but they are emotionally stable in the process.

This is, and has been, our biggest argument against “buy and hold,” and “passive investing.” While there are plenty of case studies showing why individuals will eventually get back to even, the vast majority of individuals have a “pain point,” where they will sell.

So, we approach portfolio management from a perspective of “risk management,” but not just in terms of “portfolio risk,” but “emotional risk” as well. By reducing our holdings to raise cash to protect capital, we can reduce the risk of our clients hitting that “threashold” where they potentially make very poor decisions.

In investing, the worst decisions are always made at the moment of the most pain. Either at the bottom of the market or near the peaks. 

Investing is not always easy. Our portfolios are designed to have longer-term holding periods, but we also understand that things do not always go as planned.

This is why we have limits, and when things go wrong, we sell.

So, why do I tell you this?

On Friday/Monday, our “limits” were breached, which required us to sell more.

Two Things

Two things have now happened, which signaled us to reduce risk further in portfolios.

On Sunday, the Federal Reserve dropped a monetary “nuclear bomb,” on the markets. My colleague Caroline Baum noted the details:

“After an emergency 50-basis-point rate cut on March 3, the Federal Reserve doubled down Sunday evening, lowering its benchmark rate by an additional 100 basis points to a range of 0%-0.25% following another emergency meeting.

After ramping up its $60 billion of monthly Treasury bill purchases to include Treasuries of all maturities and offering $1.5 trillion of liquidity to the market via repurchase agreements on March 3, the Fed doubled down Sunday evening with announced purchases of at least $500 billion of Treasuries and at least $200 billion of agency mortgage-backed securities.

In addition, the Fed reduced reserve requirements to zero, encouraged banks to borrow from its discount window at a rate of 0.25%, and, in coordination with five other central banks, lowered the price of U.S. dollar swap arrangements to facilitate dollar liquidity abroad”

We had been anticipating the Federal Reserve to try and rescue the markets, which is why we didn’t sell even more aggressively previously. The lesson investors have been taught repeatedly over the last decade was “Don’t Fight The Fed.”

One of the reasons we reduced our exposure in the prior days was out of concern the Fed’s actions wouldn’t be successful. 

On Monday, we found out the answer. The Fed may be fighting a battle it can’t win as markets not only failed to respond to the Fed’s monetary interventions but also broke the “bullish trend line” from the 2009 lows.  (While the markets are oversold short-term, the long-term “sell signals” in the bottom panels are just being triggered from fairly high levels. This suggests more difficulty near-term for stocks. 

This was the “Red Line” we laid out in our Special Report for our RIAPro Subscribers (Risk-Free 30-Day Trial) last week:

“As you can see in the chart below, this is a massive surge of liquidity, hitting the market at a time the market is testing important long-term trend support.”

It is now, or never, for the markets.

With our portfolios already at very reduced equity levels, the break of this trendline will take our portfolios to our lowest levels of exposure.

What happened today was an event we have been worried about, but didn’t expect to see until after a break of the trendline – “margin calls.” This is why we saw outsized selling in “safe assets” such as REITs, utilities, bonds, and gold.

Cash was the only safe place to hide.

We aren’t anxious to “fight the Fed,” but the markets may have a different view this time.

Use rallies to raise cash, and rebalance portfolio risk accordingly.

We are looking to be heavy buyers of equities when the market forms a bottom, we just aren’t there as of yet.”

On Monday morning, with that important trendline broken, we took some action.

  • Did we sell everything? No. We still own 10% equity, bonds, and a short S&P 500 hedge. 
  • Did we sell the bottom? Maybe.

We will only know in hindsight for certain, and we are not willing to risk more of our client’s capital currently. 

There are too many non-quantifiable risks with a global recession looming, as noted by David Rosenberg:

“The pandemic is a clear ‘black swan’ event. There will be a whole range of knock-on effects. Fully 40 million American workers, or one-third of the private-sector labor force, are directly affected ─ retail, entertainment, events, sports, theme parks, conferences, travel, tourism, restaurants and, of course, energy.

This doesn’t include all the multiplier effects on other industries. It would not surprise me at all if real GDP in Q2 contracts at something close to an 8% annual rate (matching what happened in the fourth quarter of 2008, which was a financial event alone).

The hit to GDP can be expected to be anywhere from $400 billion to $600 billion for the year. But the market was in trouble even before COVID-19 began to spread, with valuations and complacency at cycle highs and equity portfolio managers sitting with record-low cash buffers. Hence the forced selling in other asset classes.

If you haven’t made recession a base-case scenario, you probably should. All four pandemics of the past century coincided with recession. This won’t be any different. It’s tough to generate growth when we’re busy “social distancing.” I am amazed that the latest WSJ poll of economists conducted between March 6-10th showed only 49% seeing a recession coming”.

The importance of his commentary is that from an “investment standpoint,” we can not quantify whether this “economic shock” has been priced into equities as of yet. However, we can do some math based on currently available data:

The chart below is the annual change in nominal GDP, and S&P 500 GAAP earnings.

I am sure you will not be shocked to learn that during “recessions,” corporate “earnings’ tend to fall. Historically, the average drawdown of earnings is about 20%; however, since the 1990’s, those drawdowns have risen to about 30%.

As of March 13th, Standard & Poors has earnings estimates for the first quarter of 2020 at $139.20 / share. This is down just $0.20 from the fourth quarter of 2019 estimates of $139.53.

In other words, Wall Street estimates are still in “fantasy land.” 

If our, and Mr. Rosenberg’s, estimates are correct of a 5-8% recessionary drag in the second quarter of 2020, then an average reduction in earnings of 30% is most likely overly optimistic. 

However, here is the math:

  • Current Earnings = 132.90
  • 30% Reduction = $100 (rounding down for easier math)

At various P/E multiples, we can predict where “fair value” for the market is based on historical assumptions:

  • 20x earnings:  Historically high but markets have traded at high valuations for the last decade. 
  • 18x earnings: Still historically high.
  • 15x earnings: Long-Term Average
  • 13x earnings: Undervalued 
  • 10x earnings: Extremely undervalued but aligned with secular bear market bottoms.

You can pick your own level where you think P/E’s will account for the global recession but the chart below prices it into the market.

With the S&P 500 closing yesterday at 2386, this equates to downside risk of:

  • 20x Earnings = -16% (Total decline from peak = – 40%)
  • 18x Earnings = 24.5% (Total decline from peak = – 46%)
  • 15x Earnings = -37.1% (Total decline from peak = – 55%)
  • 13x Earnings = 45.5% (Total decline from peak = – 61%)
  • 10x Earnings = 58.0% (Total decline from peak = – 70%)

NOTE: I am not suggesting the market is about to decline 60-70% from the recent peak. I am simply laying out various multiples based on assumed risk to earnings. However, 15-18x earnings is extremely reasonable and possible. 

When Too Little Is Too Much

With our risk limits hit, and in order to protect our clients from both financial and emotional duress, we made the decision that even the reduced risk we were carrying was still too much.

One concern, which weighed heavily into our decision process, was the rising talk of the “closing the markets” entirely for a week or two to allow the panic to pass. We have clients that depend on liquidity from their accounts to sustain their retirement lifestyle. In our view, a closure of the markets would lead to two outcomes which pose a real risk to our clients:

  1. They need access to liquidity, and with markets closed are unable to “sell” and raise cash; and,
  2. When you trap investors in markets, when they do open again, there is a potential “rush” of sellers to get of the market to protect themselves. 

That risk, combined with the issue that major moves in markets are happening outside of transaction hours, are outside of our ability to hedge, or control.

This is what we consider to be an unacceptable risk for the time being.

We will likely miss the ultimate “bottom” of the market.

Probably.

But that’s okay, we have done our job of protecting our client’s second most precious asset behind their family, the capital they have to support them.

The good news is that a great “buying” opportunity is coming. Just don’t be in a “rush” to try and buy the bottom.

I can assure you, when we see ultimately see a clear “risk/reward” set up to start taking on equity risk again, we will do so “with both hands.” 

And we are sitting on a lot of cash just for that reason.Save

RIA PRO: Risk Limits Hit

For the last several months we have been issuing repeated warnings about the market. While such comments are often mistaken for “being bearish,” we have often stated it is our process of managing “risk” which is most important.

Beginning in mid-January, we began taking profits out of our portfolios and reducing risk. To wit:

“On Friday, we began the orderly process of reducing exposure in our portfolios to take in profits, reduce portfolio risk, and raise cash levels.”

Since then, as you know, we have taken profits, and rebalanced risk several times within the portfolios.

Importantly, we approach portfolio management from a perspective of “risk management,” but not just in terms of “portfolio risk,” but “emotional risk” as well. By reducing our holdings to raise cash to protect capital, we can reduce the risk of our clients hitting that “threshold” where they potentially make very poor decisions.

In investing, the worst decisions are always made at the moment of the most pain. Either at the bottom of the market or near the peaks. 

Investing is not always easy. Our portfolios are designed to have longer-term holding periods, but we also understand that things do not always go as planned.

This is why we have limits, and when things go wrong, we sell.

So, why do I tell you this?

On Friday/Monday, our “limits” were breached, which required us to sell more.

Two Things

Two things have now happened which signaled us to reduce risk further in portfolios.

On Sunday, the Federal Reserve dropped a monetary “nuclear bomb,” on the markets. My colleague Caroline Baum noted the details:

“After an emergency 50-basis-point rate cut on March 3, the Federal Reserve doubled down Sunday evening, lowering its benchmark rate by an additional 100 basis points to a range of 0%-0.25% following another emergency meeting.

After ramping up its $60 billion of monthly Treasury bill purchases to include Treasuries of all maturities and offering $1.5 trillion of liquidity to the market via repurchase agreements on March 3, the Fed doubled down Sunday evening with announced purchases of at least $500 billion of Treasuries and at least $200 billion of agency mortgage-backed securities.

In addition, the Fed reduced reserve requirements to zero, encouraged banks to borrow from its discount window at a rate of 0.25%, and, in coordination with five other central banks, lowered the price of U.S. dollar swap arrangements to facilitate dollar liquidity abroad”

We had been anticipating the Federal Reserve to try and rescue the markets, which is why we didn’t sell even more aggressively previously. The lesson investors have been taught repeatedly over the last decade was “Don’t Fight The Fed.”

One of the reasons we reduced our exposure in the prior days was out of concern we didn’t know if the Fed’s actions would be successful. 

On Monday, we found out the answer. The Fed may be fighting a battle it can’t win as markets not only failed to respond to the Fed’s monetary interventions, but also broke the “bullish trend line” from the 2009 lows.  (While the markets are oversold short-term, the long-term “sell signals” in the bottom panels are just being triggered from fairly high levels. This suggests more difficulty near-term for stocks. 

This was the “Red Line” we laid out in our last week, in the Special Report Red Line In The Sand:

“As you can see in the chart below, this is a massive surge of liquidity hitting the market at a time the market is hitting important long-term trend support.”

It is now, or never, for the markets.

With our portfolios already at very reduced equity levels, the break of this trendline will take our portfolios to our lowest levels of exposure. However, given the extreme oversold condition, noted above, it is likely we are going to see a bounce, which we will use to reduce risk into.

What happened today was an event we have been worried about, but didn’t expect to see until after a break of the trendline – “margin calls.”

This is why we saw outsized selling in “safe assets” such as REITs, utilities, bonds, and gold.

Cash was the only safe place to hide.

This also explains why the market “failed to rally” when the Fed announced $500 billion today. There is another $500 billion coming tomorrow. We will see what happens.

We aren’t anxious to “fight the Fed,” but the markets may have a different view this time.

Use rallies to raise cash, and rebalance portfolio risk accordingly.

We are looking to be heavy buyers of equities when the market forms a bottom, we just aren’t there as of yet.”

On Monday morning, we took some action.

  • Did we sell everything? No. We still own 10% equity, bonds, and a short S&P 500 hedge. 
  • Did we sell the bottom? Maybe.

We will only know in hindsight for certain, and we are not willing to risk more of our client’s capital currently. 

There are too many non-quantifiable risks with a global recession looming, as noted by David Rosenberg:

“The pandemic is a clear ‘black swan’ event. There will be a whole range of knock-on effects. Fully 40 million American workers, or one-third of the private sector labor force, are directly affected ─ retail, entertainment, events, sports, theme parks, conferences, travel, tourism, restaurants and, of course, energy.

This doesn’t include all the multiplier effects on other industries. It would not surprise me at all if real GDP in Q2 contracts at something close to an 8% annual rate (matching what happened in the fourth quarter of 2008 which was a financial event alone).

The hit to GDP can be expected to be anywhere from $400 billion to $600 billion for the year. But the market was in trouble even before COVID-19 began to spread, with valuations and complacency at cycle highs and equity portfolio managers sitting with record-low cash buffers. Hence the forced selling in other asset classes.

If you haven’t made recession a base-case scenario, you probably should. All four pandemics of the past century coincided with recession. This won’t be any different. It’s tough to generate growth when we’re busy “social distancing.” I am amazed that the latest WSJ poll of economists conducted between March 6-10th showed only 49% seeing a recession coming”.

The importance of his commentary is that from an “investment standpoint,” we can not quantify whether this “economic shock” has been priced into equities as of yet. However, we can do some math based on currently available data:

The chart below is annual nominal GDP, and S&P 500 GAAP earnings.

I am sure you will not be shocked to learn that during “recessions,” corporate “earnings’ tend to fall. Historically, the average drawdown of earnings is about 20%, however, since the 1990’s, those drawdowns have risen to about 30%.

As of March 13th, Standard & Poors has earnings estimates for the first quarter of 2020 at $139.20/share. This is down just $0.20 from the fourth quarter of 2019 estimates of $139.53.

If our, and Mr. Rosenberg’s, estimates are correct of a 5-8% recessionary drag in the second quarter of 2020, then an average reduction in earnings of 30% is most likely overly optimistic. 

However, here is the math:

  • Current Earnings = 132.90
  • 30% Reduction = $100 (rounding down for easier math)

At various P/E multiples we can predict where “fair value” for the market is based on historical assumptions:

  • 20x earnings:  Historically high but markets have traded at high valuations for the last decade. 
  • 18x earnings: Still historically high.
  • 15x earnings: Long-Term Average
  • 13x earnings: Undervalued 
  • 10x earnings: Extremely undervalued but aligned with secular bear market bottoms.

You can pick your own level where you think P/E’s will account for the global recession but the chart below prices it into the market.

With the S&P 500 closing yesterday at 2386, this equates to downside risk of:

  • 20x Earnings = -16% (Total decline from peak = – 40%)
  • 18x Earnings = 24.5% (Total decline from peak = – 46%)
  • 15x Earnings = -37.1% (Total decline from peak = – 55%)
  • 13x Earnings = 45.5% (Total decline from peak = – 61%)
  • 10x Earnings = 58.0% (Total decline from peak = – 70%)

NOTE: I am not suggesting the market is about to decline 60-70% from the recent peak. I am simply laying out various multiples based on assumed risk to earnings. However, 15-18x earnings is extremely reasonable and possible. 

When Too Little Is Too Much

With our risk limits hit, and in order to protect our clients from both financial and emotional duress, we made the decision that even the reduced risk we were carrying was still too much.

One concern, which weighed heavily into our decision process, was the rising talk of the “closing the markets” entirely for a week or two to allow the panic to pass. We have clients that depend on liquidity from their accounts to sustain their retirement lifestyle. In our view, a closure of the markets would lead to two outcomes which pose a real risk to our clients:

  1. They need access to liquidity, and with markets closed are unable to “sell” and raise cash; and,
  2. When you trap investors in markets, when they do open again there is a potential “rush” of sellers to get of the market to protect themselves. 

That risk, combined with the issue that major moves in markets are happening outside of transaction hours, are outside of our ability to hedge, or control.

This is what we consider to be unacceptable risk for the time being.

We will likely miss the ultimate “bottom” of the market?

Probably.

But that’s okay, we have done our job of protecting our client’s second most precious asset behind their family, the capital they have to support them.

The good news is that a great “buying” opportunity is coming. Just don’t be in a “rush” to try and buy the bottom.

I can assure you that when we see ultimately see a clear “risk/reward” set up to start taking on equity risk again, we will do so “with both hands.” 

And we are sitting on a lot of cash just for that reason.Save

Major Market Buy/Sell Review: 03-16-20

HOW TO READ THE CHARTS

There are three primary components to each chart:

  • The price chart is in orange
  • The Over Bought/Over Sold indicator is in gray
  • The Buy / Sell indicator is in blue.

When the gray indicator is at the TOP of the chart, there is typically more risk and less reward available at the current time. In other words, the best time to BUY is when the short-term condition is over-sold. Likewise when the buy/sell indicator is above the ZERO line investments have a tendency of working better than when below the zero line.

With this basic tutorial let’s review the major markets.

This commentary was written over the weekend prior to the Fed’s Sunday action.

This week I am leaving LAST WEEK’S charts ABOVE this week’s charts so you can realize the magnitude of the moves last week. This is important to keep “perspective” on current allocations and expectations.

S&P 500 Index

  • Last week: “Warning: SPY has triggered a longer-term “sell” signal which historically coincides with deeper declines. We highly suspect that any rally will ultimately fail and we will test the 62.8% retracement level.
  • With the market now 3-standard deviations oversold, a bounce is likely next week as it is expected the Fed will cut rates and restart a substantial QE program. A retracement to the 31.8%, 50%, 62.8% levels are possible and each level should be used to reduce equity risk and hedge. 
  • We are going to have a retest of lows before this over. 
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: Hold position
    • This Week: Hold positions
    • Stop-loss set at $250
    • Long-Term Positioning: Bearish

Dow Jones Industrial Average

  • The same situation exists with DIA.
  • Now back to extreme oversold, trading positions can be added for a counter-trend bounce back to resistance at $240-265.
  • DIA is on a very deep “Sell signal” so rallies will most likely fail in the weeks ahead.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: Hold current positions
    • This Week: Trading positions for rally only.
    • Stop-loss set at $210
  • Long-Term Positioning: Bearish

Nasdaq Composite

  • Despite the correction last week, the QQQ is the best looking index from a trading perspective. QQQ tested and held its bullish trend line, but has now registered a “sell signal.” This suggests that rallies will likely fail for the time being. 
  • The the index is very oversold, so look for a reflexive rallies back to $200, which coincides with the 200-dma, or $207 to $215 (which is optimistic.) to reduce exposure and take profits on trading positions. 
  • Trading position in QQQ for a reflexive rally back to the 200-dma which resides at $200
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: Hold position
    • This Week: Hold position
    • Stop-loss set at $175
  • Long-Term Positioning: Bearish due to valuations

S&P 600 Index (Small-Cap)

 

  • As noted in our portfolio commentary, we sold our small-cap positions 4-weeks ago.
  • Small-caps are extremely oversold, and on a very deep “sell signal.”  
  • This particular group of stocks are the most susceptible to an economic slowdown from the virus. Use any reflexive rally to step-aside for the time being.
  • You can deploy a trading position in small-caps for a bounce, but they are underperforming large cap, so I am not sure its worth the risk.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No positions
    • This Week: No positions.
    • Stop loss adjusted to $48 on trading positions.
  • Long-Term Positioning: Bearish

S&P 400 Index (Mid-Cap)

  • As with Small-cap, we have no holdings. 
  • MDY is oversold, and is on a very deep a “sell signal.”
  • MDY has broken all critical supports, and like SLY, there is no reason to “buy” the sector currently. However, MDY is oversold enough for a counter-trend bounce to sell into. Trading positions only. 
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No holding
    • This Week: No holding
  • Long-Term Positioning: Bearish

Emerging Markets

  • Three weeks ago, we stated that “EEM failed at resistance and we sold our exposures to international holdings and return our focus on large cap value for now. EEM has completed a “head and shoulders” topping pattern and violated support at the 61.8% retracement level. EEM will eventually test previous lows particularly with a sell signal now registered.” 
  • EEM is very now extremely oversold and on a deep sell-signal.
  • Use counter-trend rallies to sell into. Trading positions only. 
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No position
    • This Week: No position.
    • Stop-loss set at $32 for trading positions.
  • Long-Term Positioning: Bearish

International Markets

  • Like EEM, EFA was also sold previously. as we return our focus back to large cap value.
  • EFA is very sold and on a deep sell signal. A reflexive rally is likely back to $58 to 63 which doesn’t even get you back to the 200-dma. Use those levels to sell into.
  • Short-Term Positioning: Bearish – Market Risk Is High
    • Last Week: No position.
    • This Week: No position.
    • Stop-loss set at $50 for trading positions.
  • Long-Term Positioning: Bearish

West Texas Intermediate Crude (Oil)

  • Wow. After Russia failed to join OPEC+ in cutting production, and US drillers are producing more than current demand can offset, we said: “Drillers have to drill to make revenue to meet their debt obligations, so ultimately this is going to end very badly.”
  • We just didn’t realize how bad it would get until Saudi Arabia decided to launch a price war, thankfully, we had recommended selling all energy holdings on the Friday before that announcement.
  • We still like the sector from a “value” perspective and expect that we will wind up making a lot of money here. However, we were early, so we are going to step back and look for a better bottom to buy into. We aren’t there yet.
  • Short-Term Positioning: Bearish
    • Last Week: No positions
    • This Week: No positions.
    • Stops Triggered for any direct crude oil positions.
  • Long-Term Positioning: Bearish

Gold

  • Two weeks ago we stated: “Gold rallied sharply and broke out to new highs, suggesting there was something amiss with the stock market exuberance. The correction came this past week, confirming Gold’s message was correct.”
  • Gold had been holding up well as a hedge until this past week where two hedge funds (we suspect Citadel and Millennium) blew up creating margin liquidation across all asset classes included gold, bonds, and even bitcoin. 
  • Fortunately, we previously sold our GDX position (people intensive) and with the liquidation event over we think Gold will return to its ability to hedge. 
  • We will look to add to our position this week if Gold can hold the $200 dma and our stop level at $137.50
  • Short-Term Positioning: Bullish
    • Last week: Hold positions.
    • This week: Look to add at support of $140.
    • Stop-loss set at $137.50.
    • Long-Term Positioning: Bullish

Bonds (Inverse Of Interest Rates)

  • As noted last week: “Carl Swenlin at Decision Point agrees with our view: ‘Price has accelerated into a parabolic advance, so we should be alert for a breakdown very soon. That doesn’t mean that we’ll see a complete collapse, but it is not likely that this vertical ascent will be maintained.’”
  • We previously sold our small position in TLT, and this past week reduced our IEF position by 50% and increased BIL accordingly to shorten duration. The rest of our bond holdings have done the work of supporting the portfolio. 
  • The margin liquidation event is now bringing bonds back to a “buyable” range.
  • As we noted last week: “We agree. Bonds are getting ‘stupid’ overbought which suggests there is plenty of ‘fuel’ for a pretty vicious ‘reflex rally’ in stocks. At 5-standard deviations you are going to see a reversal in rates back to $150-152 on TLT. This is will be your next entry point to buy bonds and sell stocks.”
  • That positioning remains the same this week.
  • Short-Term Positioning: Bullish
    • Last Week: Hold positions
    • This Week: Sold 1/2 of IEF, Added to BIL, looking to add TLT back to portfolios for trading.
    • Stop-loss is moved up to $147.50
    • Long-Term Positioning: Bullish

U.S. Dollar

  • It’s been a roller coaster for the US Dollar this past two weeks.
  • Two weeks ago we stated: “This past week, the dollar surged through that resistance and is now extremely overbought short-term. Looking for a reflexive rally in stocks next week that pulls the dollar back towards the breakout level of last week..
  • The dollar rallied last week as the collapse in assets across the board from the margin liquidation event left the “dollar” as the only “safe haven.”
  • The dollar is trying to reverse its sell signal, and with the dollar back to 2-standard deviations, the rally may slow here a bit into next week. 

Profits & Earnings Suggest The Bear Market Isn’t Over.

Is the bear market over yet?

This is the question that everyone wants to know. Why? So they can “buy the bottom.” 

For that reason alone, I would suggest the current “bear market” is not over yet. Historically speaking, at the bottom of bear market cycles, as we saw in 1932, 1974, 2002, and 2008, there are few individuals willing to put capital at risk.

Given the large number of people on social media clamoring to jump back in the market given the rally this past Friday, it suggests that “optimism,” and “recency bias,” are still far too prevalent in the market.

As noted in this past weekend’s newsletter, Bob Farrell, a legendary investor, is famous for his 10-Investment Rules to follow.

“Rule #8 states:

Bear markets have three stages – sharp down, reflexive rebound and a drawn-out fundamental downtrend.”

  1. Bear markets often START with a sharp and swift decline.
  2. After this decline, there is an oversold bounce that retraces a portion of that decline.
  3. The longer-term decline then continues, at a slower and more grinding pace, as the fundamentals deteriorate.

Dow Theory also suggests that bear markets consist of three down legs with reflexive rebounds in between.

While the correction has been sharp in recent weeks, it hasn’t inflicted enough “emotional pain” to deter individuals from jumping back in. As I stated:

“That selloff sets up a ‘reflexive bounce.’  For many individuals, they will ‘feel like’ they are ‘safe.’ This is how ‘bear market rallies’ lure investors back just before they are mauled again in ‘Phase 3.’”

Just like in 2000, and 2008, the media/Wall Street will be telling you to just “hold on.” Unfortunately, by the time “Phase 3” was finished, there was no one wanting to “buy” anything.

That’s how you know a “bear market” is over.

Price To Profits & Earnings

From an investment view, I prefer more data-driven analysis to determine if the current bear market is over.

In a previous post, I discussed the deviation of the stock market from corporate profitability. To wit:

“If the economy is slowing down, revenue and corporate profit growth will decline also. However, it is this point which the ‘bulls’ should be paying attention to. Many are dismissing currently high valuations under the guise of ‘low interest rates,’ however, the one thing you should not dismiss, and cannot make an excuse for, is the massive deviation between the market and corporate profits after tax. The only other time in history the difference was this great was in 1999.”

It isn’t just the deviation of asset prices from corporate profitability which is skewed, but also reported earnings per share.

As I have discussed previously, the operating and reported earnings per share are heavily manipulated by accounting gimmicks, share buybacks, and cost suppression. To wit:

“It should come as no surprise that companies manipulate bottom-line earnings to win the quarterly ‘beat the estimate’ game. By utilizing ‘cookie-jar’ reserves, heavy use of accruals, and other accounting instruments they can mold earnings to expectations.

‘The tricks are well-known: A difficult quarter can be made easier by releasing reserves set aside for a rainy day or recognizing revenues before sales are made, while a good quarter is often the time to hide a big ‘restructuring charge’ that would otherwise stand out like a sore thumb.

What is more surprising though is CFOs’ belief that these practices leave a significant mark on companies’ reported profits and losses. When asked about the magnitude of the earnings misrepresentation, the study’s respondents said it was around 10% of earnings per share.’

cooking-the-books-2

This is also why EBITDA has become an ineffective measure of financial strength. As I noted in “Earnings Lies & Why Munger Says EBITDA is B.S.:”

“As shown in the table, it is not surprising to see that 93% of the respondents pointed to ‘influence on stock price’ and ‘outside pressure’ as the reason for manipulating earnings figures. For fundamental investors, this manipulation of earnings skews valuation analysis particularly with respect to P/E’s, EV/EBITDA, PEG, etc.”

As Charlie Munger once said:

“I think that every time you see the word EBITDA, you should substitute the word ‘bullshit’ earnings.”

Corporate Profits Weaker Than Advertised

Before the recent market rout, the deviation between reported earnings and corporate profits is one of the largest on record. This is an anomaly that should, in reality, not exist.

However, it is worse than it appears.

There is an interesting company included in the calculation of corporate profits, which is not widely recognized in most analysis. If you are an astute follower of our blog, you may recognize this particular company by the size of their balance sheet as shown below.

Yes, you guessed it (and it’s in the title). It’s the Federal Reserve.

When the Treasury Department pays interest one the debt, an expense to the U.S. Government, the Federal Reserve takes that in as “profits” which is reported on their balance sheet. Then, at the end of the year, the Fed remits a portion of the “revenue” back to the Government (who also count it as revenue).

These profits,” which are generated by the Federal Reserve’s balance sheet, are included in the corporate profits discussed here. As shown below, actual corporate profitability is weaker if you extract the Fed’s profits from the analysis.

It’s quite amazing, and with the Fed massively increasing their balance sheet, their profitability will expand further.

Nonetheless, since the Fed’s balance sheet is part of the corporate profit calculation, we must include them in our analysis. While the media is focused on record operating profits, reported corporate profits are roughly at the same level as they were in 2011. Yet, the market has been making consistent new highs during that same period.

Estimating The Risk

The detachment of the stock market from underlying profitability guarantees poor future outcomes for investors. But, as has always been the case, the markets can certainly seem to “remain irrational longer than logic would predict,” but it never lasts indefinitely.

Profit margins are probably the most mean-reverting series in finance, and if profit margins do not mean-revert, then something has gone badly wrong with capitalism. If high profits do not attract competition, there is something wrong with the system, and it is not functioning properly.” – Jeremy Grantham

The impending recession, and consumption freeze, is going to start the mean-reversion process in both corporate profits and earnings. In the following series of charts, I have projected the potential reversion.

The reversion in GAAP earnings is pretty calculable as swings from peaks to troughs have run on a fairly consistent trend. (The last drop off is the estimate to for a recession)

Using that historical context, we can project a recession will reduce earnings to roughly $100/share. The resulting decline asset prices to revert valuations to a level of 18x (still high) trailing earnings would suggest a level of $1800 for the S&P 500 index.

Let me suggest that I am not being “overly dramatic” or “super bearish.”  There is a good bit of data to support the thesis. As I noted on Twitter, you can pick your valuation range, and do the math.

Don’t believe me?

We can support that thesis with corporate profits.

If we look at inflation-adjusted profit margins as a percentage of inflation-adjusted GDP, we see the same process of mean-reverting activity over time. Of course, these mean reverting events are always coupled with recessions, crisis, or bear markets.

More importantly, corporate profit margins have physical constraints. Out of each dollar of revenue created, there are costs such as infrastructure, R&D, wages, etc. Currently, one of the biggest beneficiaries to expanding profit margins has been the suppression of employment, wage growth, and artificially suppressed interest rates, which have significantly lowered borrowing costs. The oncoming recession will cause a rather marked collapse in corporate profitability as consumption declines.

The chart below shows corporate profits overlaid against the S&P 500 index. As with GAAP Earnings in the chart above, I have projected the potential reversion in corporate profitability as well.

When we measure the cumulative change in the S&P 500 index as compared to the level of profits, we find again that when investors pay more than $1 for a $1 worth of profits, there is an reversal of those excesses

 The correlation is clearer when looking at the market versus the ratio of corporate profits to GDP. Again, since corporate profits are ultimately a function of economic growth, the correlation is not unexpected.  Hence, neither should the impending reversion in both series.

To this point, it has seemed to be a simple formula that as long as the Fed remains active in supporting asset prices, the deviation between fundamentals and fantasy doesn’t matter. It has been a hard point to argue.

However, what has started, and has yet to complete, is the historical “mean reversion” process which has always followed bull markets. This should not be a surprise to anyone, as asset prices eventually reflect the underlying reality of corporate profitability.

Recessions reverse excesses.

Are we at the bottom yet? Probably not, if history is any guide.

Market Crash. Is It Over, Or Is It The “Revenant”


  • Market Crash: Is It Over, Or Is It The Revenant?
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  • Sector & Market Analysis
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Market Crash. Is It Over, Or Is The “Revenant?”

If you haven’t seen the movie “The Revenant” with Leonardo DiCaprio, it is a 2015 American survival drama describing frontiersman Hugh Glass’s experiences in 1823. Early in the movie, Hugh, an expert hunter, and tracker, is mauled by a grizzly bear. (Warning: the scene is very graphic)

In the scene, the attack comes in three distinct waves.

  1. The bear attacks, and brutally mauls Hugh, who plays dead to survive. The attack subsides.
  2. The bear comes back, and Hugh shoots it, provoking the bear to maul him some more.
  3. Finally, Hugh pulls out his knife as the bear attacks for a final fight to the death. (Hugh wins if you don’t want to watch the video.)

Interestingly, this is also how a “bear market” works.

Bob Farrell, a legendary investor, is famous for his 10-Investment Rules to follow.

Rule #8 states:

Bear markets have three stages – sharp down, reflexive rebound and a drawn-out fundamental downtrend

  1. Bear markets often START with a sharp and swift decline.
  2. After this decline, there is an oversold bounce that retraces a portion of that decline.
  3. The longer-term decline then continues, at a slower and more grinding pace, as the fundamentals deteriorate.

Dow Theory also suggests that bear markets consist of three down legs with reflexive rebounds in between.

The chart above shows the stages of the last two primary cyclical bear markets versus today (the 2020 scale has been adjusted to match.)

As would be expected, the “Phase 1” selloff has been brutal.

That selloff sets up a “reflexive bounce.”  For many individuals, they will feel like” they are “safe.” This is how “bear market rallies” lure investors back in just before they are mauled again in “Phase 3.”

Just like in 2000, and 2008, the media/Wall Street will be telling you to just “hold on.” Unfortunately, by the time “Phase 3” was finished, there was no one wanting to “buy” anything. 

One of the reasons we are fairly certain of a further decline is due to the dual impacts of the “COVID-19” virus, and oil price shock. As noted in our MacroView:

“With the U.S. now shutting down and entrenching itself in response to the virus, the economic impact will be worsened. However, given that economic data is lagging, and we only have numbers that were mostly pre-virus, the reports over the next couple of months will ultimately reveal the extent of the damage.

With oil prices now at $30/bbl and 10-year breakeven rates to 0.9%, the math is significantly worse, and that is what the severity of the recent selloff is telling us. Over the next two quarters, we could see as much as a 3% clip off of current GDP.”

Unfortunately, while asset prices have declined, they have likely not fully accounted for the impact to earnings, permanently lost revenues, and the recessionary impact from falling consumer confidence. Historically, the gap between asset prices and corporate profits gets filled. 

In Playing Defense: We Don’t Know What Happens Next,” I estimated the impact on earnings that is still coming.

What we know, with almost absolute certainty, is that we will be in an economic recession within the next couple of quarters. We also know that earnings estimates are still way too elevated to account for the disruption coming from the COVID-19.”

“What we DON’T KNOW is where the ultimate bottom for the market is. All we can do is navigate the volatility to the best of our ability and recalibrate portfolios to adjust for downside risk without sacrificing the portfolio’s ability to adjust for a massive ” bazooka-style ” monetary intervention from global Central Banks if needed quickly. 

This is why, over the last 6-weeks, we have been getting more “defensive” by increasing our CASH holdings to 15% of the portfolio, with our 40% in bonds doing the majority of the heavy lifting in mitigating the risk in our remaining equity holdings. 

Interestingly, the Federal Reserve DID show up on Thursday as expected. In a statement from the New York Fed:

The Federal Reserve said it would inject more than $1.5 trillion of temporary liquidity into Wall Street on Thursday and Friday to prevent ominous trading conditions from creating a sharper economic contraction.

If the transactions are fully subscribed, they would swell the central bank’s $4.2 trillion asset portfolio by more than 35%.” – WSJ

As you can see in the chart below, this is a massive surge of liquidity hitting the market at a time the market is sitting on critical long-term trend support.

Of course, this is what the market has been hoping for.

  • Rate cuts? Check
  • Liquidity? Check

On Friday, the market surged, and ALMOST recouped the previous day’s losses. (Sorry, it wasn’t President Trump’s speech that boosted the market.)

However, this rally, and liquidity flush, most likely does not negate the continuation of the bear market. The amount of technical damage combined with a recession, and a potential surge in credit defaults almost ensures another leg of the beg market is yet to come. 

A look at the charts can also help us better understand where we currently reside.

Trading The Bounce

In January, when we discussed taking profits out of our portfolios, we noted the markets were trading at 3-standard deviations above their 200-dma, which suggested a pullback, or correction, was likely.

Now, it is the same comment in reverse. The correction over the last couple of weeks has completely reversed the previous bullish exuberance into extreme pessimism. On a daily basis, the market is back to oversold. Historically, this condition has been sufficient for a bounce. Given the oversold condition (top panel) is combined with a very deep “sell signal” in the bottom panel, it suggests a fairly vicious reflexive rally is likely as we saw on Friday.

The question, of course, is where do you sell?

Looking at the chart above, it is possible for a rally to the 38.2%, or 50% retracement levels. However, with the severity of the break below the 200-dma, the 61.8% retracement level, where the 200-dma now resides, will be very formidable resistance. With the Fed’s liquidity push, it is possible for a strong “Phase 2” rally. Our plan will be to reduce equity exposure at each level of resistance and increase our equity hedges before the “Phase 3” mauling ensues. 

The following chart is a longer-term analysis of the market and is the format we use for “onboarding” our clients into allocation models. (Vertical black lines are buy periods)

“But Lance, how do you know that Friday wasn’t THE bottom?”

A look at longer-term time-frames gives us some clues.

With all of our longer-term weekly “sell signals” now triggered from fairly high levels, it suggests the current selloff is not over as of yet. In other words, we will see a rally, followed by a secondary failure to lower lows, before the ultimate bottom is put in. 

I have mapped out the three most logical secondary bottoms for the market, so you can assess your portfolio risk accordingly. 

  1. A retest of current lows that holds is a 27% decline.
  2. A retest of the 2018 lows, most likely, is an average recessionary decline of 32.8%
  3. A retest of the 2016 lows, coincident with a “credit event,” would entail a 50.9% decline. 

Given the weekly signals have only recently triggered, we can look at monthly data to confirm we still remain confined to a “bearish market” currently. 

On a monthly basis, sell signals have been triggered. However, these signals are NOT VALID until the end of the month. However, given the depth of the decline, it would likely require a rally back to all-time highs to reverse those signals. This is a very high improbability.

Assuming the signals remain, there is an important message being sent, as noted in the top panel. The “negative divergence” of relative strength has only been seen prior to the start of the previous two bear markets, and the 2015-2016 slog. While the current selloff resembles what we saw in late 2015, there is a risk of this developing into a recessionary bear market later this summer. The market is holding the 4-year moving average, which is “make or break” for the bull market trend from the 2009 lows.

However, we suspect those levels will eventually be taken out. Caution is advised.

What We Are Thinking

Since January, we have been regularly discussing taking profits in positions, rebalancing portfolio risks, and, most recently, moving out of areas subject to slower economic growth, supply-chain shutdowns, and the collapse in energy prices. This led us to eliminate all holdings in international, emerging markets, small-cap, mid-cap, financials, transportation, industrials, materials, and energy markets. (RIAPRO Subscribers were notified real-time of changes to our portfolios.)

There is “some truth” to the statement “that no one” could have seen the fallout of the “coronavirus” being escalated by an “oil price” war. However, there have been mounting risks for quite some time from valuations, to price deviations, and a complete disregard of risk by investors. While we have been discussing these issues with you, and making you aware of the risks, it was often deemed as “just being bearish” in the midst of a “bullish rally.” However, it is managing these types of risks, which is ultimately what clients pay advisors for.

It isn’t a perfect science. In times like these, it gets downright messy. But this is where working to preserve capital and limit drawdowns becomes most important. Not just from reducing the recovery time back to breakeven, but in also reducing the “psychological stress,” which leads individuals to make poor investment decisions over time.

As noted last week:

“Given the extreme oversold and deviated measures of current market prices, we are looking for a reflexive rally that we can further reduce risk into, add hedges, and stabilize portfolios for the duration of the correction. When it is clear, the correction, or worse a bear market, is complete, we will reallocate capital back to equities at better risk/reward measures.”

We highly suspect that we have seen the highs for the year. Most likely, we are moving into an environment where portfolio management will be more tactical in nature, versus buying and holding. 

Take some action on this rally. 

If this is a “Phase 2” relief rally of a bear market, you really don’t want to be around for the “final mauling.”


The MacroView

If you need help or have questions, we are always glad to help. Just email me.

See You Next Week

By Lance Roberts, CIO


Financial Planning Corner

You’ll be hearing more about more specific strategies to diversify soon, but don’t hesitate to give me any suggestions or questions.

by Danny Ratliff, CFP®


Market & Sector Analysis

Data Analysis Of The Market & Sectors For Traders

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S&P 500 Tear Sheet  


Performance Analysis


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Sector & Market Analysis:

Be sure and catch our updates on Major Markets (Monday) and Major Sectors (Tuesday) with updated buy/stop/sell levels

Sector-by-Sector

Everything was crushed again this past week, so the difference between leading and lagging sectors is which sector fell faster or slower than the S&P 500 index itself. 

Improving – Discretionary (XLY), Real Estate (XLRE), and Staples (XLP)

Last week, we rebalanced our weightings in Real Estate and Staples, as these sectors are now improving in terms of relative performance. After getting very beaten up, we are looking not only for the “risk hedge” of non-virus related sectors but an eventual outperformance of the groups. 

We sold our entire stake in Discretionary due to potential earnings impacts from a slowdown in consumption, supply chain problems, and inventory issues. This worked well as Discretionary fell sharply last week. 

Current Positions: Target Weight XLU, XLRE

Outperforming – Technology (XLK), Communications (XLC), and Utilities (XLU)

The correction in Technology this past week broke support at the 200-dma but finished the week very close to our entry point, where we had slightly increased our exposure. These have “anti-virus” properties, so we are looking for the “risk hedge” relative to the broader market. Communication and Utilities didn’t perform as well but also held up better during the decline on a relative basis. We are watching Utilities and may reduce exposure if interest rates begin to rise due to the Fed. The same with Real Estate as well. 

Current Positions: Target weight XLK, XLC, XLU

Weakening – Healthcare (XLV)

We did bring our healthcare positioning back to portfolio weight as the sector will ultimately benefit from a “cure” for the “coronavirus.” Also, with Bernie Sanders now lagging Joe Biden on the Democratic ticket, this removes some of the risks of “nationalized healthcare” from the sector. 

Current Position: Target weight (XLV)

Lagging – Industrials (XLI), Financials (XLF), Materials (XLB), and Energy (XLE)

We had started to buy a little energy exposure previously but closed out of the positions as we were stopped out of our holdings week before last. We are going to continue to monitor the space due to its extreme oversold condition and relative value and will re-enter our positions when stability starts to take hold. 

We also sold Financials due to the financial risk from a recessionary impact on the outstanding corporate debt which currently exists. The Fed’s rate cut also impacts the bank’s Net Interest Margins, which makes them less attractive. Industrials and Materials have too much exposure to the “virus risk” for now.

Current Position: None

Market By Market

Small-Cap (SLY) and Mid Cap (MDY) – Week before last, we sold all small-cap and mid-cap exposure over concerns of the impact of the coronavirus. Remain out of these sectors for now. However, given that Central Banks are going “all in” on stimulus, we may look for a trade in these sectors short-term.

Current Position: None

Emerging, International (EEM) & Total International Markets (EFA)

Same as small-cap and mid-cap. Given the spread of the virus and the impact on the global supply chain. Trading opportunity only. 

Current Position: None

Dividends (VYM), Market (IVV), and Equal Weight (RSP) – We have decided to consolidate our long-term “core” holding into IVV only. We sold RSP and VYM and added to IVV. The reason for doing this is the disparity of performance between the 3-holdings. Since we want an “exact hedge” for our portfolio, IVV is the best match for a short-S&P 500 ETF.

Current Position: IVV

Gold (GLD) – This past week, Gold sold off as the Fed introduced liquidity giving the bulls hope and removing the “fear” factor in stocks. There was also a massive “margin call” that led to a liquidation event. Gold is VERY oversold currently. Add positions to portfolios with a stop $140. We sold our GDX position due to the fact mining is people-intensive and is located in countries most susceptible to the virus. 

Current Position: IAU (GOLD)

Bonds (TLT) –

Bonds also broke out to new highs as the correction ensued. Last Friday, we took profits in our 20-year bond position (TLT) to reduce our duration slightly, raise cash, and take in some profits. Bonds are extremely overbought now, so be cautious, we are maintaining the rest of our exposures for now, but we did rebalance our duration by selling 1/2 of IEF and adding to BIL. 

Current Positions: DBLTX, SHY, IEF, PTIAX, BIL

Sector / Market Recommendations

The table below shows thoughts on specific actions related to the current market environment.

(These are not recommendations or solicitations to take any action. This is for informational purposes only related to market extremes and contrarian positioning within portfolios. Use at your own risk and peril.)

Portfolio/Client Update:

Thank goodness. The market finally responded to the Fed on Friday. 

Please read “Trading The Bounce” above as it details our plan on how we are going to trade this liquidity rally. 

As noted last week:

“Staying true to our discipline and strategy is difficult when you have this type of volatility. We question everything, every day. Are we in the right place? Do we have too much risk? Are we missing something? 

The ghosts of 2000, and 2008, stalk us both, and we are overly protective of YOUR money. We do not take our jobs lightly.”

We took some further actions to increase cash, further rebalance risks this past week. We are now using this rally to add hedges, and reduce equities until the current “sell signals” reverse. As noted, this is most likely a “bear market” rally that will fail. 

However, if it is the beginning of a new “bull market,” then we will simply remove hedges and add to our equity longs. 

Be assured we are watching your portfolios very closely. However, if you have ANY questions, comments, or concerns, please don’t hesitate to email me.

Portfolio Actions Taken Last Week

  • New clients: Only adding new positions as needed.
  • Dynamic Model: Sold VOOG, and hedged portfolio. Currently unhedged. 
  • Equity Model: Sold IEF and added to BIL to shorten bond portfolio duration. Sold RSP and VYM, and added slightly to IVV to rebalance our CORE holdings for more effective hedges. 
  • ETF Model: Same as Equity Model.

Note for new clients:

It is important to understand that when we add to our equity allocations, ALL purchases are initially “trades” that can, and will, be closed out quickly if they fail to work as anticipated. This is why we “step” into positions initially. Once a “trade” begins to work as anticipated, it is then brought to the appropriate portfolio weight and becomes a long-term investment. We will unwind these actions either by reducing, selling, or hedging if the market environment changes for the worse.


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Market Crash. Is It Over, Or Is It The “Revenant”


  • Market Crash: Is It Over, Or Is It The Revenant?
  • MacroView: Fed Launches A Bazooka To Kill A Virus
  • Financial Planning Corner: Tips For A Volatile Market
  • Sector & Market Analysis
  • 401k Plan Manager

Follow Us On: Twitter, Facebook, Linked-In, Sound Cloud, Seeking Alpha



Catch Up On What You Missed Last Week


Market Crash. Is It Over, Or Is The “Revenant?”

If you haven’t seen the moving “The Revenant” with Leonardo DiCaprio, it is a 2015 American survival drama describing frontiersman Hugh Glass’s experiences in 1823. Early in the movie, Hugh, an expert hunter, and tracker, is mauled by a grizzly bear. (Warning: the scene is very graphic)

In the scene, the attack comes in three distinct waves.

  1. The bear attacks, and brutally mauls Hugh, who plays dead to survive. The attack subsides.
  2. The bear comes back, and Huge shoots it, provoking the bear to maul him some more.
  3. Finally, Huge pulls out his knife as the bear attacks for a final fight to the death. (Hugh wins if you don’t want to watch the video.)

Interestingly, this is also how a “bear market” works.

Bob Farrell, a legendary investor, is famous for his 10-Investment Rules to follow.

Rule #8 states:

Bear markets have three stages – sharp down, reflexive rebound and a drawn-out fundamental downtrend

  1. Bear markets often START with a sharp and swift decline.
  2. After this decline, there is an oversold bounce that retraces a portion of that decline.
  3. The longer-term decline then continues, at a slower and more grinding pace, as the fundamentals deteriorate.

Dow Theory also suggests that bear markets consist of three down legs with reflexive rebounds in between.

The chart above shows the stages of the last two primary cyclical bear markets versus today (the 2020 scale has been adjusted to match.)

As would be expected, the “Phase 1” selloff has been brutal.

That selloff sets up a “reflexive bounce.”  For many individuals, they will feel like” they are “safe.” This is how “bear market rallies” lure investors back in just before they are mauled again in “Phase 3.”

Just like in 2000, and 2008, the media/Wall Street will be telling you to just “hold on.” Unfortunately, by the time “Phase 3” was finished, there was no one wanting to “buy” anything. 

One of the reasons we are fairly certain of a further decline is due to the dual impacts of the “COVID-19” virus, and oil price shock. As noted in our MacroView:

“With the U.S. now shutting down and entrenching itself in response to the virus, the economic impact will be worsened. However, given that economic data is lagging, and we only have numbers that were mostly pre-virus, the reports over the next couple of months will ultimately reveal the extent of the damage.

With oil prices now at $30/bbl and 10-year breakeven rates to 0.9%, the math is significantly worse, and that is what the severity of the recent selloff is telling us. Over the next two quarters, we could see as much as a 3% clip off of current GDP.”

Unfortunately, while asset prices have declined, they have likely not fully accounted for the impact to earnings, permanently lost revenues, and the recessionary impact from falling consumer confidence. Historically, the gap between asset prices and corporate profits gets filled. 

In Playing Defense: We Don’t Know What Happens Next,” I estimated the impact on earnings that is still coming.

What we know, with almost absolute certainty, is that we will be in an economic recession within the next couple of quarters. We also know that earnings estimates are still way too elevated to account for the disruption coming from the COVID-19.”

“What we DON’T KNOW is where the ultimate bottom for the market is. All we can do is navigate the volatility to the best of our ability and recalibrate portfolios to adjust for downside risk without sacrificing the portfolio’s ability to adjust for a massive ” bazooka-style ” monetary intervention from global Central Banks if needed quickly. 

This is why, over the last 6-weeks, we have been getting more “defensive” by increasing our CASH holdings to 15% of the portfolio, with our 40% in bonds doing the majority of the heavy lifting in mitigating the risk in our remaining equity holdings. 

Interestingly, the Federal Reserve DID show up on Thursday as expected. In a statement from the New York Fed:

The Federal Reserve said it would inject more than $1.5 trillion of temporary liquidity into Wall Street on Thursday and Friday to prevent ominous trading conditions from creating a sharper economic contraction.

If the transactions are fully subscribed, they would swell the central bank’s $4.2 trillion asset portfolio by more than 35%.” – WSJ

As you can see in the chart below, this is a massive surge of liquidity hitting the market at a time the market is sitting on critical long-term trend support.

Of course, this is what the market has been hoping for.

  • Rate cuts? Check
  • Liquidity? Check

On Friday, the market surged, and ALMOST recouped the previous days losses. (Sorry, it wasn’t President Trump’s speech that boosted the market.)

However, this rally, and liquidity flush, most likely does not negate the continuation of the bear market. The amount of technical damage combined with a recession, and a potential surge in credit defaults almost ensures another leg of the beg market is yet to come. 

A look at the charts can also help us better understand where we currently reside.

Trading The Bounce

In January, when we discussed taking profits out of our portfolios, we noted the markets were trading at 3-standard deviations above their 200-dma, which suggested a pullback, or correction, was likely.

Now, it is the same comment in reverse. The correction over the last couple of weeks has completely reversed the previous bullish exuberance into extreme pessimism. On a daily basis, the market is back to oversold. Historically, this condition has been sufficient for a bounce. Given the oversold condition (top panel) is combined with a very deep “sell signal” in the bottom panel, it suggests a fairly vicious reflexive rally is likely as we saw on Friday.

The question, of course, is where do you sell?

Looking at the chart above, it is possible for a rally to the 38.2%, or 50% retracement levels. However, with the severity of the break below the 200-dma, the 61.8% retracement level, where the 200-dma now resides, will be very formidable resistance. With the Fed’s liquidity push, it is possible for a strong “Phase 2” rally. Our plan will be to reduce equity exposure at each level of resistance and increase our equity hedges before the “Phase 3” mauling ensues. 

The following chart is a longer-term analysis of the market and is the format we use for “onboarding” our clients into allocation models. (Vertical black lines are buy periods)

“But Lance, how do you know that Friday wasn’t THE bottom?”

A look at longer-term time-frames gives us some clues.

With all of our longer-term weekly “sell signals” now triggered from fairly high levels, it suggests the current selloff is not over as of yet. In other words, we will see a rally, followed by a secondary failure to lower lows, before the ultimate bottom is put in. 

I have mapped out the three most logical secondary bottoms for the market, so you can assess your portfolio risk accordingly. 

  1. A retest of current lows that holds is a 27% decline.
  2. A retest of the 2018 lows, most likely, is an average recessionary decline of 32.8%
  3. A retest of the 2016 lows, coincident with a “credit event,” would entail a 50.9% decline. 

Given the weekly signals have only recently triggered, we can look at monthly data to confirm we still remain confined to a “bearish market” currently. 

On a monthly basis, sell signals have been triggered. However, these signals are NOT VALID until the end of the month. However, given the depth of the decline, it would likely require a rally back to all-time highs to reverse those signals. This is a very high improbability.

Assuming the signals remain, there is an important message being sent, as noted in the top panel. The “negative divergence” of relative strength has only been seen prior to the start of the previous two bear markets, and the 2015-2016 slog. While the current selloff resembles what we saw in late 2015, there is a risk of this developing into a recessionary bear market later this summer. The market is holding the 4-year moving average, which is “make or break” for the bull market trend from the 2009 lows.

However, we suspect those levels will eventually be taken out. Caution is advised.

What We Are Thinking

Since January, we have been regularly discussing taking profits in positions, rebalancing portfolio risks, and, most recently, moving out of areas subject to slower economic growth, supply-chain shutdowns, and the collapse in energy prices. This led us to eliminate all holdings in international, emerging markets, small-cap, mid-cap, financials, transportation, industrials, materials, and energy markets. (RIAPRO Subscribers were notified real-time of changes to our portfolios.)

There is “some truth” to the statement “that no one” could have seen the fallout of the “coronavirus” being escalated by an “oil price” war. However, there have been mounting risks for quite some time from valuations, to price deviations, and a complete disregard of risk by investors. While we have been discussing these issues with you, and making you aware of the risks, it was often deemed as “just being bearish” in the midst of a “bullish rally.” However, it is managing these types of risks, which is ultimately what clients pay advisors for.

It isn’t a perfect science. In times like these, it gets downright messy. But this is where working to preserve capital and limit drawdowns becomes most important. Not just from reducing the recovery time back to breakeven, but in also reducing the “psychological stress,” which leads individuals to make poor investment decisions over time.

As noted last week:

“Given the extreme oversold and deviated measures of current market prices, we are looking for a reflexive rally that we can further reduce risk into, add hedges, and stabilize portfolios for the duration of the correction. When it is clear, the correction, or worse a bear market, is complete, we will reallocate capital back to equities at better risk/reward measures.”

We highly suspect that we have seen the highs for the year. Most likely, we are moving into an environment where portfolio management will be more tactical in nature, versus buying and holding. 

Take some action on this rally. 

If this is a “Phase 2” relief rally of a bear market, you really don’t want to be around for the “final mauling.”


The MacroView

If you need help or have questions, we are always glad to help. Just email me.

See You Next Week

By Lance Roberts, CIO


Financial Planning Corner

You’ll be hearing more about more specific strategies to diversify soon, but don’t hesitate to give me any suggestions or questions.

by Danny Ratliff, CFP®


Market & Sector Analysis

Data Analysis Of The Market & Sectors For Traders


S&P 500 Tear Sheet  


Performance Analysis


Technical Composite


ETF Model Relative Performance Analysis


Sector & Market Analysis:

Be sure and catch our updates on Major Markets (Monday) and Major Sectors (Tuesday) with updated buy/stop/sell levels

Sector-by-Sector

Everything was crushed again this past week, so the difference between leading and lagging sectors is which sector fell faster or slower than the S&P 500 index itself. 

Improving – Discretionary (XLY), Real Estate (XLRE), and Staples (XLP)

Last week, we rebalanced our weightings in Real Estate and Staples, as these sectors are now improving in terms of relative performance. After getting very beaten up, we are looking not only for the “risk hedge” of non-virus related sectors but an eventual outperformance of the groups. 

We sold our entire stake in Discretionary due to potential earnings impacts from a slowdown in consumption, supply chain problems, and inventory issues. This worked well as Discretionary fell sharply last week. 

Current Positions: Target Weight XLU, XLRE

Outperforming – Technology (XLK), Communications (XLC), and Utilities (XLU)

The correction in Technology this past week broke support at the 200-dma but finished the week very close to our entry point, where we had slightly increased our exposure. These have “anti-virus” properties, so we are looking for the “risk hedge” relative to the broader market. Communication and Utilities didn’t perform as well but also held up better during the decline on a relative basis. We are watching Utilities and may reduce exposure if interest rates begin to rise due to the Fed. The same with Real Estate as well. 

Current Positions: Target weight XLK, XLC, XLU

Weakening – Healthcare (XLV)

We did bring our healthcare positioning back to portfolio weight as the sector will ultimately benefit from a “cure” for the “coronavirus.” Also, with Bernie Sanders now lagging Joe Biden on the Democratic ticket, this removes some of the risks of “nationalized healthcare” from the sector. 

Current Position: Target weight (XLV)

Lagging – Industrials (XLI), Financials (XLF), Materials (XLB), and Energy (XLE)

We had started to buy a little energy exposure previously but closed out of the positions as we were stopped out of our holdings week before last. We are going to continue to monitor the space due to its extreme oversold condition and relative value and will re-enter our positions when stability starts to take hold. 

We also sold Financials due to the financial risk from a recessionary impact on the outstanding corporate debt which currently exists. The Fed’s rate cut also impacts the bank’s Net Interest Margins, which makes them less attractive. Industrials and Materials have too much exposure to the “virus risk” for now.

Current Position: None

Market By Market

Small-Cap (SLY) and Mid Cap (MDY) – Week before last, we sold all small-cap and mid-cap exposure over concerns of the impact of the coronavirus. Remain out of these sectors for now. However, given that Central Banks are going “all in” on stimulus, we may look for a trade in these sectors short-term.

Current Position: None

Emerging, International (EEM) & Total International Markets (EFA)

Same as small-cap and mid-cap. Given the spread of the virus and the impact on the global supply chain. Trading opportunity only. 

Current Position: None

Dividends (VYM), Market (IVV), and Equal Weight (RSP) – We have decided to consolidate our long-term “core” holding into IVV only. We sold RSP and VYM and added to IVV. The reason for doing this is the disparity of performance between the 3-holdings. Since we want an “exact hedge” for our portfolio, IVV is the best match for a short-S&P 500 ETF.

Current Position: IVV

Gold (GLD) – This past week, Gold sold off as the Fed introduced liquidity giving the bulls hope and removing the “fear” factor in stocks. There was also a massive “margin call” that led to a liquidation event. Gold is VERY oversold currently. Add positions to portfolios with a stop $140. We sold our GDX position due to the fact mining is people-intensive and is located in countries most susceptible to the virus. 

Current Position: IAU (GOLD)

Bonds (TLT) –

Bonds also broke out to new highs as the correction ensued. Last Friday, we took profits in our 20-year bond position (TLT) to reduce our duration slightly, raise cash, and take in some profits. Bonds are extremely overbought now, so be cautious, we are maintaining the rest of our exposures for now, but we did rebalance our duration by selling 1/2 of IEF and adding to BIL. 

Current Positions: DBLTX, SHY, IEF, PTIAX, BIL

Sector / Market Recommendations

The table below shows thoughts on specific actions related to the current market environment.

(These are not recommendations or solicitations to take any action. This is for informational purposes only related to market extremes and contrarian positioning within portfolios. Use at your own risk and peril.)

Portfolio/Client Update:

Thank goodness. The market finally responded to the Fed on Friday. 

Please read “Trading The Bounce” above as it details our plan on how we are going to trade this liquidity rally. 

As noted last week:

“Staying true to our discipline and strategy is difficult when you have this type of volatility. We question everything, every day. Are we in the right place? Do we have too much risk? Are we missing something? 

The ghosts of 2000, and 2008, stalk us both, and we are overly protective of YOUR money. We do not take our jobs lightly.”

We took some further actions to increase cash, further rebalance risks this past week. We are now using this rally to add hedges, and reduce equities until the current “sell signals” reverse. As noted, this is most likely a “bear market” rally that will fail. 

However, if it is the beginning of a new “bull market,” then we will simply remove hedges and add to our equity longs. 

Be assured we are watching your portfolios very closely. However, if you have ANY questions, comments, or concerns, please don’t hesitate to email me.

Portfolio Actions Taken Last Week

  • New clients: Only adding new positions as needed.
  • Dynamic Model: Sold VOOG, and hedged portfolio. Currently unhedged. 
  • Equity Model: Sold IEF and added to BIL to shorten bond portfolio duration. Sold RSP and VYM, and added slightly to IVV to rebalance our CORE holdings for more effective hedges. 
  • ETF Model: Same as Equity Model.

Note for new clients:

It is important to understand that when we add to our equity allocations, ALL purchases are initially “trades” that can, and will, be closed out quickly if they fail to work as anticipated. This is why we “step” into positions initially. Once a “trade” begins to work as anticipated, it is then brought to the appropriate portfolio weight and becomes a long-term investment. We will unwind these actions either by reducing, selling, or hedging if the market environment changes for the worse.


THE REAL 401k PLAN MANAGER

A Conservative Strategy For Long-Term Investors


 

Model performance is based on a two-asset model of stocks and bonds relative to the weighting changes made each week in the newsletter. This is strictly for informational and educational purposes only and should not be relied upon for any reason. Past performance is not a guarantee of future results. Use at your own risk and peril.

 

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