What a crazy market. Down 34% in 24 trading sessions, then up 42% in the next 76 sessions. How in the world can an investor make sense of this? And what should they do now?
Be smart and take advantage of the situation
The market is headed higher. How much higher is anybody's guess, but it's headed higher for now. That could change tomorrow, but for now the direction of the market is inexoribly higher. Why is this?
As my first mentor was fond of saying, "there are more buyers than sellers." And it's true. For whatever reason, the buyers are dominating the market now. But why? Why are the buyers dominant in a severe recession and a pandemic that seems to be getting worse every day?
The answer is that the buyers are looking ahead, and they think they see a return to normalcy sooner than the rest of us. But are they right? Only time will tell, but momentum is on their side for now.
Don't fight the tape
The late, great Marty Zweig said early and often "don't fight the tape." What did he mean? He meant that when the market is going in one direction, only a fool would bet against it. Today the direction is higher, so don't be a fool and bet against it.
Don't fight the Fed
Marty also said "don't fight the Fed." Today the Fed has made it clear that they will do whatever it takes to keep the economy from falling into another depression. They are flooding the zone with nearly-free money. They are buying Treasury bonds, corporate bonds, and even junk bonds to prevent a meltdown in the credit markets.
The Bernanke Fed did something similar in 2008, and it worked. Maybe it will work this time too. But we have to be aware of the bloated Fed balance sheet and recognize the risk of a resurgence in inflation, or the possibility of deflation. All it would take is a miscalculation by chairman Powell and his team.
These are real risks, and buyers of equities should pay close attention to them.
The play for the next big up
How high do you think this market can go in the next 12 months? The high-water mark is 3386 on the S&P 500 Index. Today we stand 5.9% below that mark. Theoretically, we could get there in one big up day. More likely it would take a few weeks to get there, assuming that the bullish trend continues.
And what is likely to happen if and when we blow through the previous high? Buyers' remorse? Unlimited upside? You tell me, but I think we would need record corporate earnings in a recession and pandemic. Not very likely, is it?
The play for the next big down
How low do you think this market can go in the next 12 months? The most recent low-water mark was 2237 on the S&P 500 index. I have given up on my call for a re-test of that level. I now think that the coordinated action by the Fed and Congress will limit the downside to 2500. And it would take some combination of very bad news in order to get there.
For example, a resurgence of the pandemic, causing a resuming of the economic shut-down, which we're starting to see early evidence of now. A failure of schools to re-open in the Fall. A failure of corporate earnings returning to record highs. A high-profile infection or death such as Trump, Pence, or a highly ranked cabinet member or Supreme Court Justice.
If you want to play the downside, you have about a 20% possible gain from here. Compare that to a possible 10% upside and you'll see that the odds are in your favor.
The play for either scenario
Lucky for you, you don't have to pick a side, either the big up or the big down. You can instead opt for a portfolio of stocks or ETFs that are positioned to outperform in either environment. Case in point are my own model portfolios. I don't have a monopoly on outperforming, but what I do have is a long track record. 20 years, in most cases.
These are actual portfolios used by real clients over the past 20 years. The results speak for themselves. What you see in the table below is the YTD performance of all 13 of my model portfolios. 10 of the 13 models captured alpha, meaning that they beat their benchmarks. How did I do this?
I did this by writing algorithms that look for specific characterists in stocks, like Quality, Value, Momentum, and Contrarianism. It has been a good year for these model portfolios, with 10 of the 13 beating their benchmarks. And it has been a good 20 years as well, as all of these models outperformed the S&P 500 index.
In my intro I asked "What should an investor do now?" The answer is, don't fight the tape, don't fight the FED, and buy assets that are well-positioned to take advantage of the current market environment.
You advice was not correct. You rely to much on technical analysis and not enough on understanding the forces that move the market.
On April 13, 2020 when you did not encourage buying I wrote what you did not write or understand. I made a ton of money since April 13, 2020. If your followers listened to you they probably did not make much.
Here is what I wrote in this space on April 13, 2020:
” History is no good this time. Why? 2 trillion from fiscal policy and more coming. 2-3 trillion from monetary policy (Fed) and more. Fed even buying corporate bonds. …THIS NEVER HAPPENED BEFORE. THIS TIME IS DIFFERENT!!! There may be a few dips from here but will not last long. Have to buy quick. Don’t fight the fed and now monetary policy. Don’t listen to the new. Just buy the dips. 6 and 12 months from now you will be very happy.”
I was right. You too cautious.
Howard Randall