If you are perpetually timid you doom yourself to under-performance
The Marcus Today Growth SMA has outperformed its very demanding ASX 300 Accumulation benchmark by 20% in just over a month courtesy of a 70% plus cash holding. Well done us, but that’s not the point. The point is that having reduced cash from 70% to 40% yesterday, this morning we are (almost) “All in”. 93% invested is pretty much all in. Cash is down from 70% to 7%.
Don’t worry, I am as smart as you, and I understand that this could be another dead cat spike and that there could be a long road ahead with COVID-19 and I know there is a very good chance that the bottoming we are seeing now could be a false dawn. Every bear market has spikes, the biggest rallies always occur in a bear market. Here's another. The Dow just had its biggest-ever points gain last night and the biggest percentage rally since 1933.
But maybe this is the bottom.
There is no doubt that we are seeing the first significant technical bottoming in the markets (see charts below) and that alone would be enough for us to at least reduce our very aggressive cash position, but we are going further, we are going long again.
Let’s be clear - We are not after clicks, we are not grandstanding, we are guessing as every other fund manager buying in the last 24 hours is guessing. Every decision in the stock market has to be made with an element of the unknown but if you are perpetually timid you doom yourself to underperformance. Chickens don’t make money and as I wrote yesterday, fund managers are not demi-Gods, we like you, "don’t know", but we are charged with the responsibility of making decisions on experience that some investors can't make, or don't make, but we have to make. Timing the bottom is not possible using science or fundamentals (earnings numbers are in flux anyway), it is going to take 'feel'. We have that feeling and are going to do something about it.
But we are not doing it on a whim, we have our reasons.
- We know we don't know, but we have an insurance policy. We are a small fund. If this is a false dawn we can easily reverse it.
- There is a very good chance the market has over-reacted to COVID-19. The market has fallen 38% from top to bottom and some of the banks 56%, more than they fell in the GFC, in just a month. Investors have decided this chapter will destroy 40% of the stock market's value. They do not have evidence of that yet. It may prove to be, and we can sell again if it continues to unfold, but if not these prices will prove to be a very rare opportunity we cannot miss. This is a table showing market performances since the top:
- The market is pricing in an economic catastrophe based on months of business lockdowns. The CEO of Starbucks reports this morning that they are reopening stores in China and are “on the uptick”. That’s 9 weeks from start to finish. Wuhan is out of lockdown. Hubei has eased travel restrictions. Railways are now offering 45% discounts to actively encourage the Chinese to travel again (!)
- The number of daily deaths in Italy has peaked.
- There is a good article on Livewire from Christopher Joye talking about “Peak Virus”. It’s a statistical look at the spread of the virus and suggests that peak virus in the US and Australia is likely in early to mid-April and we are already in late March.
- There is noise about the FDA approving anti-viral drugs that alleviate symptoms and reduce mortality rates which would significantly relax COVID-19 paranoia.
- The central bank action (overreaction) has made sure that when the "All Clear" sounds the stock market is going to price in economic settings “on steroids”. The previous highs may not be high enough.
- If the US stops playing politics we could see a two trillion dollar backstop package any moment - If the US stops playing politics and fires its bazooka the market could potentially bottom this week on the overkill. They have been on the two yard line for a week as CNBC says - the touchdown is coming.
- The fear will peak. At the moment the UK and Australia are at ‘peak fear’. In Italy they are past it. Trump is clearly getting impatient already. Loo paper, pasta, rice, sanitiser and soap will re-appear on the shelves, soon, and on the same cycle our ‘fear’ is going to turn from headless paranoia, to acceptance, then boredom to impatience. Then be forgotten. Trump is already asking how much of the farm they have to burn to contain 'this thing'. The US is trying to encourage people to get back to work already. We are going to be throwing away COVID-19 test kits in a year’s time. Look up from the frenzy.
- The biggest driver in the stock market at the moment is sentiment not earnings. The sentiment swings are fast and extreme. There is a good chance we are coming off a negative extreme. We cannot wait for fundamentals to prove us right, this sentiment improvement could be all over in two minutes.
- We are fearful of missing out on a very sharp market rally. Almost all fund managers are writing this up as a once in a decade buying opportunity but are still debating "when". With this universal understanding that at some point we have to buy, when the sentiment improvement is universal it will be too late, the bounce when it comes will rapidly leave us behind. We have to move early.
- The stock market will anticipate an improvement in the virus experience well in advance of the human experience. The markets will bottom whilst we are at home with COVID-19. We have to buy before the all clear.
- We are supposed to buy when others are fearful. The VIX Volatility index has just peaked – see charts below.
- The Italian market, some European markets and some of our large stocks are losing their downside momentum and there are even some early buy signals on some technical indicators – see charts below.
- Our Members, and the investors in our fund, expect us to do things they can’t or won't do, like making the decision to buy when all around us are losing their heads. And sell again if we are wrong.
Peak negativity will only be obvious in hindsight, we know we may not be there yet, but our judgement is that we have discounted an Armageddon that may not happen and if we don’t act quickly we’ll get left behind.
This is not a big call, its not a declaration that "this is the bottom". We are not trying to get clicks. We know this could be wrong, of course it could. This is simply the transparent admission to you that we now think we risk a short sharp large rally in the market and we don't want to miss it. Our observations suggest sentiment is now going to improve.
The Italians have led the Western World COVID-19 experience and their market has had its first significant bounce. There is an RSI and a MACD buy signal on this daily chart.
The German market has also seen a MACD and RSI buy signals. As an export market-weighted to motor manufacturers that have been disrupted by a lack of components because of COVID-19 they are also a barometer of COVID-19 stock market sentiment.
Boeing is proving to be the bellwether stock of the financial crisis fears and that too has bottomed in the very short term.
The VIX volatility index has topped out from GFC levels. Another signal that sentiment has bottomed. If you are supposed to buy when others are fearful then this is telling you that that moment has come, and is going.
The Australian dollar is a barometer of global economic growth prospects – it falls when global growth prospects weaken and it has fallen 17.6% in just eight days. It is now bottoming.
The 8% bounce in the US market overnight is not technically convincing, but it is an early sign of a technical bottom. Certainly, MACD suggests the momentum of the fall has peaked (Moving Average Convergence Divergence – the blue histogram – a buy signal is when it crosses from below to above zero).
Our market will have another rally today after a 4.2% pop yesterday (24/3/2020).
We spent yesterday getting back to market weight in some of the big index stocks and are now adding a list of large-quality stocks that are not in the front line come COVID-19 fall out. Buying cruise line stocks (some are up 40% overnight in the US) is for braver managers than us. There are plenty of quality growth stocks that are not directly at risk from COVID-19. Healthcare is a focus. Here are the TOP 50 and NEXT 50 stocks and their performance over this chapter.
One of the lowest risk trades in the GFC was buying Hybrids that got smashed on concerns that the major banks would go out of business. In the end, the banks didn’t miss a payment and the hybrids came back from 25-60c in the dollar to par. When our financial crisis fears are contained they will do so again. Here is a table showing the performance of the major hybrids movers over various time periods. Over a month most are down over 20% - 30%. In hindsight, this could once again prove to be the lowest risk trade in the whole market (don’t shoot me if the major banks go bust!).
SECTORS IN THIS SELL OFF
I told Emma this morning that "Now I have some time on my hands I think I'm going to write some poetry".
"Can we separate?"