Bomb's Already Blown Up
Friends and family are contacting me in a bit of a panic based on their eroding account values. As I've been preaching (for years!), every asset class will lose half of its value at some point in your lifetime. And, as I also preach, there are NO good longer-term investments.
Last night, I was presented with a portfolio that was supposed to be "conservative-"at least that's what she asked for a year ago. It's getting annihilated. I'm guessing the manager thought that you could create a conservative portfolio by sprinkling assets around into things like bonds, some gold stocks, emerging markets, and putting a sizable portion into "safe" blue chip companies. I doubt that there was very little "management" involved-other than drinking their firm's Koolaid of "good companies" and "diversified investments."
Unfortunately, we're in a liquidation market. This means that ALL asset classes are getting sold-even gold. Bonds, which usually represent a flight to safety and initially rallied, are getting creamed too. As you see below, stocks, bonds, physical gold & gold stocks, and real estate are all headed in the same direction. A "diversified" portfolio of these four areas (and any other additional asset classes, sans cash) now has a 100% correlation to stocks. And, BTW, "good" stocks are going down too. In fact, maybe even more-"blue chip" Dow stocks have slid more than the S&P during this whole mess.
Since the "bomb's already blown up," I'm caught between a rock and a hard place. Yes, oversold markets are due to bounce, but quite often, oversold can become even more oversold-just go back a few shorts weeks when stocks were considered very oversold. My fear is that it's always darkest right before it gets "more dark-"oversold becomes even more oversold. The oversold dilemma-sell and the market promptly has the mother-of-all rallies or hang on and darkest becomes "more dark."
Since it's a damned if you do and damned if you don't situation, I don't have a good answer. I guess even though it's painful, you might consider selling down to the sleeping level, especially if we begin to see the mother-of-all retrace rallies (i.e., use rallies as a chance to lighten up).
I don't want to come across in hindsight on any of this. I'm saying the same thing that I said on the two previous bear markets. You must have a plan in place for the next bear market. On ANY investment purchased, have an exit point in mind. This is not to say to exit on the first signs of adversity, but rather at a level where the investment has begun to fail. Treat your stocks (and any other investments) like employees. As long as they're working, they stay. However, when they begin to underperform, they're fired. You have to be a ruthless trading tyrant when it comes to cutting bad employees.
"Working" is defined based on the volatility of the underlying instrument. A biotech IPO might retrace 20% or more and still be trending. FWIW, my research has shown that stocks overall (basis the $SPX) should be questioned when they drop 10% or more from their 50-week closing high-the basis of my TFM 10% system. Follow the 2020 Bear Market Updates and take the free market timing course:
I'm amazed at how much time people spend on frivolous activities, but won't spend a minute thinking about their future until the bomb has blown up. I get it, we all need to have hobbies, interests outside of work, and occasionally need some mindless activities. I'm a big fan of having fun as often as possible. And, often, people ask, "how much idle time do you have?" My point is, spend some time getting your head on straight, but also spend a few minutes to understand how markets work: they go up and they go down-and by "down" I mean occasionally 50% or more. Spend a few minutes weekly (or ideally daily!) checking on your "employees." Those who are no longer working must be eliminated.
Don't Be Annoyed By The Gurus (and I can assure you that I'm not one of them!)
When I logged into YouTube this morning, the first thing that comes up is a presentation by a guru on how he called the top. He won't be the first to come out of the woodwork, and he won't be the last! Me? Well, FWIW, I posted all my sell signals here as they occurred. And, no, I didn't call a top--but had plenty signals fire off when the market hit the -10% threshold (e.g., The TFM 10% System which triggered on 02/27/20). Remember, as a trend follower, you will be a little late to leave the party. It was painful getting knocked out of previously good longs. I'm sure now that I'm short, the retrace rally will be painful too. As a trend follower, you won't always look smart, but who cares! You might even be called a "Trend Following Moron." We're not paid to look smart. We're paid to follow along-and sometimes that means following the mantra of "he who fights and runs away, lives to fight another day."
There's also going to be a batch of gurus that will come out of the woodwork after the market bottoms. I've been seeing a plethora of predictions lately. Predict early, and often, I suppose! I promise not to call a bottom. I will point out point out buy signals as they occur. Unfortunately, for now, the Big Blue Arrow continues to point down.
So Where Are We Now?
By any metric, this market is extremely oversold and due to bounce. Again though, that does not mean that you should attempt to catch the falling knife. It's amazing, I come in this morning, and the futures are "only" down 60 points. A few months ago, I would consider that "getting creamed" and a "gift horse" for a nice intra-day reversal. Now, down 60 feels like the market did okay overnight! For the trader types, make sure that you're lightening up on the short side as the initial profit targets are hit. Yesterday, a client brought up a good point: The liberal stop on a short stock approaching single digits is now almost as much as the max gains possible. I'm going to continue to (trend) follow the model portfolio (for now) as I always do, but this does bring up some food for thought. With zero being the max profit and being within 10-points of zero, now might be the time to consider lightening up. Short side profits can evaporate quickly. Speaking of shorts, virtually all stocks at this juncture are too oversold for shorting. Wait for the retrace rallies (i.e., pullbacks) to reset. For the buy and hold types, anything that I say, again, puts me between a rock and a hard place. About the best thing that I can say is to use retrace rallies to sell down to the "sleeping level." And, get educated for next time!
May the trend be with you!