Hi everyone, on 22nd Mar 2020, I came out of hiding and warned of "an intermediate bottom that may last weeks". My blog post came out the day before the actual bottom itself. I said that "some stocks might have already seen the bottom", which turned out to be correct for PLNT which I recommended to look at.
I was the first that I knew of that called the bottom publicly. At the time, Goldman Sachs were still bearish. They reversed their call almost 3 weeks later, after the markets surged 25%.
I gave a possible strategy going forward (buy stocks close to insider trading prices but use the MACD to cut it if it doesn't go your way). I listed many laggard stocks over the last couple weeks. SPG, XOM, PLNT, STOR, ONEOK, ET, IHRT, DK, etc. If you entered them based on the strategy, they have recouped between 20% to 100%. The only one that is still lagging is WFC that is at the same price as 2 months ago.
I followed up by giving weekly webinars explaining what I was seeing in the markets and why the markets should hold up until more visible damage to company bottom lines appeared.
The broad markets have surged back almost as if no one cares about COVID19 anymore. They do. But many underestimated the unprecedented FED stimulus package. That kept up spending at a high level even when many were out of work.
Of course, the spending went disproportionately into different sectors. Food stuff, medical supplies, technology and gaming took most of the pie. REITs and banks are strongly lagging. But still, no financial crisis. No major stream of defaults. The FED bought up many MBS to support mortgage markets, and its like "magic", the low oil price started recovering.
This was another good call for me as in the webinar, I made the argument that the two most stressed sectors are mortgage and oil and if there is no crisis in those sectors, the the markets will gradually recover as the impact from COVID19 becomes more obvious and manageable. I showed how the FED had been strongly buying up the MBS, and I showed how record number of insiders were buying their own energy stocks. I told you guys that "this tells me that either they expect the oil price to recover or they have calculated the impact of the impact of the oil price and they think the damage can be absorbed by the system - meaning big boys buying up small boys."
So here we are, I've been bullish for the last 2 months and silent for the last 4 weeks trying to write my book "Godly Wisdom in the Financial Markets: A story of a trader learning to catch the bottom in life and the stock market". What do I think today?
I glanced at the market the last two days. Here are my thoughts:
1) We are actually not overbought yet, it's possible for the market to have support still.
This is a measurement of Smart Money vs Dumb Money confidence. You find that in the last 3 years, corrections tend to take place when the Dumb Money is high (red) and Smart money is low (blue). Notice the bottom of the Mar market was marked with high Smart Money confidence and low dumb money confidence.
Now, dumb money is about to cross into high territory, but this doesn't mean that a correction is imminent, it just means that a lot more retail investors are "in it" and so there is more money available to "pull out" if they want to. But will they pull out? Additionally, Smart money is not yet in the bearish low zone yet.
I take this to mean that we are likely in the last one quarter phase of this intermediate cycle. I'm still bullish ... unless the COVID19 takes a sudden turn for the worst ... a new mutation, for instance OR, if the US trade war turns into a kinetic war.
Side note: A kinetic war is unlikely but not impossible. It's not because Trump is "erratic". Trump only cares for the US to make money and a strong stock market, which was happening by doing the Phase 1 trade deal. However, multiple nations have been questioning the not so neighborly attitude of the CCP. Even the democrats had recently signed a bill opposing the human-rights transgression of the CCP on the Uyghurs. Japan has already indicated they are moving some of their supply chain out of China.
CCP has not been doing itself much favors either to improve the world's perception of them. In response to have an independent inquiry on the genetic and physical origins of the virus, CCP slapped a couple tariffs on Australia to shut them up, calling them "chewing gum on China's shoe". While countries are busy fixing their own damages, CCP foists an unilateral security law on HK, showing again that they can ignore constitutions or laws.
Any way, so long as these potential tensions don't escalate, we should be moving in late bullish stage of this intermediate cycle. (by late, I mean most of the easy gains are over ... and have to pick stocks carefully)
The weekly SPX chart also corroborates this:
Statistics show that once the market crossed up the 70 wk average, it doesn't collapse back that quickly unless something significant occurs. Even in weakness, there should be a couple bounces of it first.
2. In a situation where the broad markets are almost overbought, but the bull market is still intact, then a possible strategy is to sell off your big winners and look at laggards.
The sector rotation shows that leaders like the XLP and XLK are weakening, Of course, tech and staples surged because they were the ones that made more money during the COVID lockdown. REITs were taking a hit to earnings.
If the world is going to do a mean-reversion to more normal behavior, then many REITS are still cheap. The rotation shows that real estate, industrial and finance are starting to improve. Now would be a good time to look at stocks like STOR, CIM, the banks and industrials like OEC. IHRT and ETM are interesting to looks at, they are "riskier" in the sense that ad revenue is yet to come back... but if it does the rewards are great.
The strategy going forward is still similar.
Look for companies that are good and fundamentally cheap. If you can get them close to insider buying price, that's a bonus.
For stocks that have surged, it might be prudent to start taking some profit. Consider looking at stocks from the lagging sectors that have insider buying support, have the fundamentals to last 1-2 years of poor earnings or have an obvious earnings improvement story as the economy opens up. It's a stock pickers market now, to find those companies that are still undervalued while most stocks have moved up, some more than others.
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