We have a big 20-40% pop in the stocks we mentioned last week that we were nibbling on. Read the report here. If you followed us, we recommended to take profit on those that surged. So now what?
(TL:DR Buy laggards close to strong insider buying price on pullback but be willing to cut positions if the MACDs cut downward.)
The market is basically existing in the simultaneous possibilities that Ben Bernanke and FED chief stated, that we are going into a 1) sharp but temporary recession, and 2) into a full-blown financial crisis characterized by large unemployment and companies going bankrupt.
The stimulus is unprecedented.
The thesis of a sharp one or two quarter decline before recovery has some merit. The US government and FED acted swiftly and in a big way, cutting bank rates to zero, promising to 1T a week to purchase all sorts of bonds coupled with the largest stimulus in US history. The hope is that this can tide the unemployment and unprofitably companies with debt for a couple months.
In an Fortune article on March 17, 2020, Goldman Sachs predicts a whopping -24% contraction to GDP in 2H before a 13% pick up in Q3 and 10% in Q4.
Goldman Sachs chief equity strategist David Kostin said, in a separate note, the S&P 500 could fall to as low as 2,000 points if the economic impact of the virus worsens but expected the index to reach 3,200 by the end of 2020.
3,200 by the end of the year? That isn’t too bad.
Even Former Fed Chairman Ben Bernanke sees ‘very sharp’ recession, followed by ‘fairly quick’ rebound.
But the CCP virus is also unprecedented.
Comparing the CCP virus to SARS, MERS etc, while some of those examples were deadlier than the coronavirus, they were far more limited in scope. For example, it’s far less deadly than Middle East respiratory syndrome, or MERS, which has killed around 34% of the roughly 2,500 confirmed cases since it was first reported in 2012 in Saudi Arabia. Estimates for the COVID19 is from 1-3%.
In the US, Trump wants to start work by Easter.
However, a recent analysis from the University of Pennsylvania estimated that even if social-distancing measures can reduce infection rates by 95 percent, 960,000 Americans will still need intensive care. There are only about 180,000 ventilators in the U.S. and, more pertinently, only enough respiratory therapists and critical-care staff to safely look after 100,000 ventilated patients. Abandoning social distancing would be foolish. Abandoning it now, when tests and protective equipment are still scarce, would be catastrophic.
There are already recent rumblings that the US is running short on ventilators in NY.
There are also reports that the infection rates in China is more than reported.
Even if the increased deaths does not have a direct impact on the economy and stock market, it will still affect the psychology of traders as the constant infection rate and death rate headlines saturate the headlines.
In summary, only time will tell if this stimulus is enough vs the actual severity of the virus.
That being said, here is how I view the market. In the absence of more clarity, the market’s natural direction will be down or flat, but might be short term bounces on any sort of good news in terms of development of treatments and vaccines and not so bad news in terms of major company reportings.
I also want to say that the bottom of the stock market doesn’t occur when there is great visibility, it occurs before that. The bottom of the stock market occurs when the news is so negative that many people felt sick the financial markets. At the bottom of the stock market during the GFC in March 2009, the S&P 500 was pricing in five years of profit recession. I remember reports at that time saying that the stock market would be a zombie market for years. I remember my professional friends who were doctors and lawyers get so disheartened and destroyed by the stock market that they stopped looking at their investments altogether. The recession ended in the summer.
But, when prices are volatile and falling, when the news cycle is so negative, our emotions get in the way. So we need to look back at history give us a little bit more clarity. We look at Insider Behavior, Technicals, Vix, and give an idea of a plan going forward.
This article is just to provide a look under the "hood" of the financial markets, to offer more clarity with the hope you can put together a proper plan instead of getting whipped by the market.
Ww have a spike in CEO buying of their own stocks rivaling the bottoming pattern of the 2008 financial crisis.
The peak CEO insider buy-to-sell ratio was 2.3 in Nov 2008, as compared with just last week’s 1.8. History tells us the first spike of insider buying starts the process for the bottom to be formed but does not guarantee that this is the absolute bottom.
Using the GFC as an example, since the historic spike in insider buying, the bottom in mid-Oct 2008 was 850. It started the deceleration of the free fall, even having bounces of +20-30% along the way, but eventually had two more bottoms, at 750 in Nov 2008 and finally 666 in March 2009.
In terms of insider buying, here are some interesting points to note:
If we are in a bear market, the first big spike in insider buying in a recession starts the deceleration of the free fall. There will be strong bounces, but might still make a lower low. If we are still in a bull market (meaning there will be a recovery in 6 months), then the insider spike is quite timely.
In either case, if you are a long-term investor and if you buy at the CEO insider prices, you are likely going to be make money in a year, even if you miss the actual bottom.
Even when the SPX went lower from the Nov 2008 bottom to March 2009 bottom. Some companies made a higher bottom like GLW. Even more impressive, GLW’s insider trading occurred in Nov 2008, meaning they nailed the absolute low.
However, the March 2009 bottom is caused at the tail end of a recession caused by the popping of a real estate asset bubble. It took a year and a half to develop. In the COVID case, the unemployment and weak numbers just got started and the price dropped 30%. Traders are simultaneously expecting the worse, but mulling over the unprecedented stimulus package and monetary policies.
What about the VIX?
The VIX also bears the same story.
In the last depression, the VIX spike signaled the start of the free fall deceleration, and the final bottom formed 3 months later. Here’s a closer look:
Although we had lower bottoms, every time the VIX spiked so high, you have a 20-30% bounce from the local lows before a drop lower.
What about now?
The MACD just cut. But we are on strong resistance. Here is the weekly chart:
You can see the totally expected rejection from the 200 wk average. I didn’t expect to get there so quickly, but it did. In terms of candle sticks, we got a big bullish engulfing candle to the last week.
My thoughts: I expect downside pressure if prices so too high, by high, I mean close to the 200-week average, and I expect some investors to get back in if the price of certain stocks goes back down towards insider prices (or nearer to the last low) until there is more clarity. I expect a choppy consolidation at these levels until more clarity of whether the COVID starts to overwhelm hospitals and insurance companies, or if there is more progress of the COVID treatment front, and if companies report better than expected guidance. A double bottom would not surprise me.
In the short term, a retracement to 2400 is possible and a good place to add positions. However, if the MACD cuts downwards, we assume the selling program is in force and you should be looking for an opportunity to raise cash and cut some positions..
My personal strategy going forward: Since the SPX MACD has finally cut upwards, I sell stocks that have already surged and buy the battered stocks on pullbacks that haven’t surged yet from their insider buy price. I only buy stocks that seem likely they will not go bankrupt and have significant insider buying. For example, we bought PLNT at 35 and sold it when it surged last week, we recycled it to WFC that hasn’t surged yet. We have also been nibbling at stocks listed below.
However, we are keeping stops.
If the SPX MACD cuts downwards again, we assume the selling program has started up and gotten momentum. As long as the SPX MACD hasn’t cut downward, I assume that value investors and insiders will accumulate at these levels. Remember that we’ve only had 1 good week of buying accumulation so far.
So, buy laggards on pull backs with insider buying support, but be ready to cut them if the MACD cuts downward.
Medium Downsides – We have cut convincingly through the 200 wk average, the market believes we are in a bear market.
Short term Downsides - We hit the 200 wk average. Bearish traders with conviction will short here again, and we have to see if there are enough value investors, insiders and funds to accumulate enough to overwhelm them.
Short term Upsides: -
Daily MACD just cut
Daily RSI just peeked out of oversold
Weekly chart shows a bullish engulfing candle.
At the lows, there was a bevy of insider buying at those levels.
Short term best case: likely won’t breakout immediately but consolidate.
Short term worst case: retest of lows.
Conclusion: in the short term, there can be a sell off after last weeks surge, but a new low is unlikely at the moment. Buy bombed out stocks with good insider buying and have their MACD cut upward on pullbacks and have tight stops when the stock MACD cuts downward. However, everything has to be reassessed as Easter comes. This is when new headlines of accelerated infection rates and a strained health care system may pop up.
Some companies with big insider buying last week: DELL, STWD, LNC, VST, ONEOK, XOM, WFC.
The prices have already risen 10-30% from the prices those insiders bought, be a little patient and wait for prices to get to levels closer to their buy price.
If you are short term investor, buy these on pull back but cut if the MACDs cut downward. If you are a long-term investor, you can buy and hold these; but you could, as a precaution, reserve some cash in case the market gives you an even bigger discount in the future as the COVID headlines start to overwhelm the public consciousness.
As a help, I list down some of the insider buy prices for the stocks above.
Each stock has a different risk reward profile and may react differently with market conditions going forward.
Also, we might be going back to the cave that we came from and not be active in writing these posts. We only came out to address the COVID market crisis, and may not be posting so regularly.
God speed everybody!
Drop a comment if you think these reports help.
Disclaimer: This report is for educational purposes only, for you to get a sense of how traders in QuantZombie think. Before investing any monies, please do you own due diligence and consult your professional financial advisor. This report is not an encouragement to buy or to sell.
PS: My Secret Ingredient
In times like this, I always fall back on my Christian faith. Just like in the GFC, I find the wisdom and precision God gives very necessary to combat the fear and information thrown at us from all sides in the financial markets.
The ability to be brave when everyone is fearful, and clear thinking in the midst of chaos does not come naturally. If so, everyone would be millionaires. Instead people are fearful, selfish, love their status so much that they do selfish and impulsive things in the midst of chaos. In the supermarkets, we see it when people fight over toilet paper. In the financial markets, we buy at stock at 10 year lows, but sell it quickly when it drops another 15%, only to see it spike 40% 1 week later.
If you are Christian, remember what you have in Jesus, and ask Him for a double portion of it.
For the Spirit God gave us does not make us timid, but gives us power, love and self-discipline. (2 Tim 1:7)
If any of you lacks wisdom, you should ask God, who gives generously to all without finding fault, and it will be given to you. (James 1:5)
And this is the confidence that we have toward him, that if we ask anything according to his will he hears us. And if we know that he hears us in whatever we ask, we know that we have the requests that we have asked of him. (1 Cor 5:14-15)
During these times of great shaking, you might feel regret, sorrow, frustration. You might feel you've lost too much money and feel condemned.
I've been there.
Let this be the time you realign your life and ask God what He is doing.
1) Align yourself with God's will and not yours. Apologize for living a selfish life, ask God what He is trying to accomplish and actively help that cause.
2) Understand the promises given to all those who are in-Christ.
3) Ask Him for a heart of real courage, to keep fighting, and making right decisions from now on.
4) Ask God for supernatural wisdom that cuts deeper than the hysteria of the masses.