Market Update: We've surged more than 25% on the SPX since our bottom call. Is it time to sell n

Dear friends, it's been awhile since another market update. I trust this blog finds you well? We should have another Zoom meeting. I'd love to hear how you guys are doing through the COVID19 event in life and in financial markets. I'd have a coffee with you if we were in the same place. I pray that you will be in perfect peace whose mind is set on Him.

Here's some thoughts I have on the shorter term and longer term outlook.

I added two new candidates to add to your list to look at too.

TL:DR

1) Short-term overbought and I wouldn't be surprised if it were going to be flat or down.

2) But, longer term, the economy is not fractured and we should be looking for buying opportunities.

3) Take some profit from those that have surged. Either wait a while, or recycle them into laggards that are still cheap that will make money even in a COVID19 slowed down economy world.

The Market Update proper

Short term concerns

The short term MACD has cut down. This alone is not a sell-signal. But ...

Dumb money has finally reached the "over-excited" levels. So, combined with the MACD cut, it increases the probability for weakness in the short term. It's not a guarantee, but think of over-excited dumb money as fuel and bad news is the match. On bad news, there is more of this money that can be pulled out. Smart money is actually NOT over-bearish, but neutral. This reinforces the narrative that some institutional funds missed the rally and are are looking for a way to get in at cheaper prices.

EDIT (14 June 2020): As of today, I am seeing the news cycle sensationalize all the stuff from months ago. I typed "Stock market" on the YouTube search bar. The first entry is "Why I Waiting for the Next Stock Market Crash". Out of the first 5 videos, 3 of them are talking about bearishness.You have young 20-year olds GenZ making videos, "The RED just CRUSHED the Stock Market, If you listen closely, he is not adding anything new to the bearish narrative out there. However, the point is that the media that retail investors are starting to see are cycling into bearish.

I cannot tell the future, but one possible future is retail investors selling due to the negative news cycle. Because the optimism of the retailer is extreme, this can last days and weeks. But at a certain point, funds that haven't got enough exposure to the stock market will come in. End EDIT.

I think short term weakness is possible. But, I don't think we will see a crash, or new lows that take out the March lows. There will be a "new" bottom that is higher than the old bottom. This range will be defended by insiders that were willing to buy their stocks in May at higher than March prices, and value funds looking for a good price range to get in.

Tangential Point

But out of interest, you'll see that in the last 3 years bull markets, bigger corrections are ripe only when dumb money are usually at the highs and smart money are at lows. Smart money are not at lows. That's why there could be a correction due to profit taking but not a crash, unless COVID19 instigates another lock down.

I put up the Smart/Dumb chart during 2009 to show you that at extreme bottoms, "dumb" money can actually act first! But during the regular market cycles, that doesn't really happen. Don't forget. "Dumb" money simply means retail investors. There are many astute retail investors that can react quicker.

So where are the strong statistical support?

I mentioned that the 70wk average is always a strong support in a bullish market. That's about 2960. We almost got there before bouncing back up.

Although I think we will be flat/go a little lower, there is a chance we go below the 70 wk. If so, then the 200 wk is very strong support. Statistically, a market is net "bullish" when we are above the 200 wk, which is where we are now. It will take ALOT of bad news to drop below that. Profit taking, or slow earnings in companies won't do that. That's about 2685.

If the 70 wk breaks, and price goes towards the 200 wk, I think that should be a buying opportunity, unless there is clear evidence that the COVID19 infections and death are unmanageable.

For myself, I would plan for both scenarios.

For longer term players (like me). Keep some stocks in case the correction is light. But, you have to be HAPPY to keep those stocks in case prices don't surge for awhile. For example, some REITs are paying double digit yields and are quite safe. I would be happy to hold those unless prices get better.

If you sold stocks that have surged now... no one can blame you! I would if I were you. Just maybe not all. In fact, you should be congratulated that you bought when the retail investors were pessimistic, and sold now when they are too comfortable. In doing so, you have proven that you are not the "average" investor!

Then I'd start looking for individual stocks to buy, and decide on the buy price range beforehand so that you won't hesitate too much if price gets there. As mentioned before, the most convenient benchmark would be recent insider buying prices. But, doing your own DD on the business and profitability is key.

...

Longer Term Bullish

Here are the longer term risks and what I think:

1) Virus shuts down the economy again

2) FED stops bond repurchases and QE

FED language indicates that they will do "whatever it takes" to make sure the economy isn't going to crash. But, some jobs aren't coming back in a long time.

"We're not even thinking about thinking about raising rates."

"There are just a lot of people that are unemployed and it seems quite likely there will be a significant group ... that will still be struggling to find jobs."

This sounds to me as: Economy will slowly grow after this quarter's GDP big drop. No financial crisis. Interest rates will be low. FED will step in again if needed.

People on the street want to go back to work. Many think the 1 month+ lock down was an overreaction. I think countries are going to learn to "live with the virus". People are going to social distance and wear masks. Gyms and restaurants will be half full. But most people are going to return to work.

Investors across the board are still holding on to a lot of cash, (poll the people around you, ask them if they have spare cash or are they fully invested) and eventually they will realize there isn't anywhere else to get yield with interest rates so low. Many professional and retail investors missed out the rally.

...

Some ideas to consider if there is a further pullback.

Eventually, many funds that are looking for yield are going to be buying value or dividend stocks since bonds have such low rates.

Although stocks have run up and many are due for a correction, some are still "lagging" in the sense that they haven't gone up as much and have indicators of value.

Those who are looking to do some due diligence on, try NLY and HPQ.

I think both are cheap for long term investors. Both companies will be ok in a slowed, low-interest rate economy. Remember that in the 3Q and 4Q, there is going to be a dynamic variance of how COVID19 will affect the economy. Some people will lose their jobs permanently, some others will drop in productivity because of geographical challenges or forced behavior modification. For example, restaurants may not be full capacity and if the infections increase too quickly, will the gov restrict their seating density again?

I think these two candidates will navigate such a situation.

NLY is yielding 13% yield and trades about 20% lower in book value. Book value doesn't look to drop. The FED has been buying up the MBS. This almost guarantees you'll get a yield of 13% and an additional 20% when the market eventually rerates this stock to it's BV.

As of this writing, NLY is trade at $6.97. Here's an article.

HPQ refused to be acquired by Xerox at $24 a share in Feb 2020. The board prices $24/share at a low 7x fwd PE based on 2022 targets. In Feb 2020, the Board agreed on a share repurchase plan of $15B. This is ~60% of their current market cap of 23B!

Initially, they were going to buy back $8B in the first year, and $7B afterwards via free cash flow, cash and debt.Today, they have postponed the buyback due to COVID19 but stated that they still "intend to pursue a significant enhanced share repurchase program... the specifics will be determined once market conditions stabilize... will update in Q3..."

This is prudent. But this also means that it's another indicator that HPQ is cheap, and the initiation of this buyback plan where we will get any update a few months from now is a catalyst. If they institute this buy back plan, you have tailwinds outside of COVID19 recovery.

As of this writing, HPQ is trading at ~$16.3. Here's an article.

Both have insider buying at prices that are not too far away from present prices compared to the majority of other stocks. These stocks may not be 1x baggers, we could only get close to it 2 months ago. But if you are late, these are worthy considerations.

I'm sure that in a year, you will make some money. If you have a much shorter time frame, you have to wait and see if there is more short term profit-taking on the broad markets.

BOTH candidates HPQ and NLY will be able to grind through the economic displacement. For HPQ, demand for computers should be more stable if more people need to work from home. For NLY, the FED supports their MBSs.

Bible Corner 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

This is not common sense, but divine wisdom, the discernment to connect the dots in the way God sees it, and not as how man sees it. The most beautiful part is that the reason God doesn't find fault is not because we deserve it, but because of Jesus, allowing us to come before His throne of grace in our time of need. The free gift of righteousness allows us to go unafraid before God to for wisdom and discernment for the times we are in.

If we only rely on our human intellect or experience, we might end up in the wrong place because of how limited and myopic we can be. "There is a way that appears to be right, but in the end it leads to death." Proverbs 14:12

God bless everyone!

Drop a comment if you agree or disagree, or if you have ideas of stocks or market to share!

Your friendly neighborhood QuantZombie,

Ken

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