How to Play the Recovery Trade

HAIR ON FIRE IN THE US - HOW TO PLAY THE RECOVERY TRADE The hopes for a vaccine have sent the Dow up 911 or 3.85% overnight. The S&P 500 was up 3.15%. The UK up 4.29%. The German market up 5.67%. The French market up 5.16%. The oil price up 8.12%. BHP and RIO in the US up 8.32% and 8.05%. The SPI Futures up 109. The US Healthcare sector is now just 2% from its high this year, the S&P 500 down just 12.9%, the US Technology sector down just 6.05%. The US financial news Anchors are debating whether the US rally is believable. They, and all the debaters, are missing the point. Again. Trying to make predictions. The important message overnight is that the herd has started to focus on the possibility that there is a vaccine, on the possibility that the coronavirus will miraculously go away and it’s a powerful head turning theme. And the herd turned, for a day at least. Getting it right from here is not a guess based on how likely it is that the coronavirus will miraculously go away, but an assessment (that we will make on a daily basis) of how much the herd will factor in the chances of the coronavirus miraculously going away. It is a potentially powerful market driver, it has all the ingredients. It is easy to understand and we all, including the herd, so desperately want it to be true. So it will be easily (recklessly) adopted. Believe and invest first, facts later. The impact of the coronavirus going away, if true, would be priced into the stock market very quickly. It would turbo-charge the recovery in company earnings and the bounce back in the global economy. The 'thinkers' will be left behind in a blink, just as the 'thinkers' were left behind in the fall. Sometimes you have to think less, act fast and re-assess on the fly, and this just might be one of those moments. Not convinced? Don't believe in a vaccine? You're missing the point. Your opinion doesn't matter, if the stock market begins to believe it you have to factor in. Especially if you are a benchmarked fund manager, because it could end of one of the biggest stock market opportunities in a decade and the underperformance will be permanent. ZERO to 100 zero to 100
  • Zero on the stock market sentiment scale is the most bearish end of the spectrum. Zero is the expectation that COVID-19 is with us forever, there is no vaccine, there will be constant relapses, lengthy re-lockdowns and a depression rather than a recession.
  • 100 is the expectation that a vaccine will be available immediately, we don’t have to worry about COVID-19 ever again, every company is going to get back to work immediately and a V-Shaped economic recovery starts today leaving no permanent economic damage.
Obviously there is a scale and we are somewhere on it. You are all going to be debating it. But one thing is clear overnight, the needle just moved closer to 100. The TV anchor debate in the US this morning was a microcosm of all investors this morning. One says to sell into strength and the market is ahead of itself (predictable finger wagging chicken response). Another says “go to the sidelines” (paralysed at exactly the wrong moment). Another says “there is a risk people are getting too optimistic" (Zero value-add making a living out of stating the blinking obvious). Another says “I don’t know” (honest but will never make money in the stock market waiting until they do know). Disappointingly none of them say “buy with your hair on fire”. Let me add that as a view some of you will take. The real answer, and the key to the market in the end, is buried in medical fact. The Medical facts are also, probably, unknown as yet and we, let alone TV anchors, need not debate or express a strong view, because they, and we, simply cannot know. Its pointless having a “view” on that without being a medical expert. Its just posturing, for the camera perhaps. But the stock market answer is not factual its sentimental, and is based on what the stock market herd believes and wants to believe irrelevant of medical fact, and on a scale of zero to 100 measuring what level of an instantly virus free world the stock market is going to price in, the herd is, obviously, off zero and not at 100%. But its definitely off zero. Overnight tells you that the herd is clearly, easily, interested in this theme, it has grabbed their attention and they are very keen to run with it. So lets assume we are somewhere between 0-100%. Where you personally choose to be on that scale is your choice. I know where I am – I’m at 30-40%, which is probably too high, but it is influenced by being a benchmarked fund manager, I simply cannot afford to miss it if its right, the cost of being wrong is permanent performance damage. If the herd grabs the theme, the market is going to move fast and we are going to miss the opportunity to buy the market, to buy the energy sector when it is 41% off the top, the REITs 35% of the top, Qantas (ASX: QAN) 54% off the top, Worley (ASX: WOR) 49% off the top, URW (ASX: URW) 68% off the top, Santos (ASX: STO) 46% off the top, Flight Centre (ASX: FLT) 76% off the top, Webjet (ASX: WEB) 74% off the top, IDP Education (ASX: IEL) 41% off the top, and all the other stocks and sectors that have not yet recovered. Here is a list of Australian sectors and how far they have fallen from the top: list of Australian sectors All you need to do this morning is factor in a higher possibility of a recovery rally continuing. We are playing that by getting more fully invested. But that's us. It's your choice. Read the newswires, delve into the medical facts if you must, make a decision. WHAT TO BUY FOR A MOVE CLOSER TO 100 I cannot correctly predict where we are on the scale and cannot therefore spoon feed cash into your bank accounts, you have to do that, and it is a personal choice depending on your investment style and risk profile. But, the value I can add today is to tell you what stocks to buy if you wanted to factor in some level of vaccine cured virus free world. I can tell you what to buy if we were at 100 - its not rocket science. Wall St has told us the whole story this morning. The performance in the US overnight is the market telling you that “this is what will happen if CV-19 went away” and whether it reverses or not doesn't matter, it is a very interesting window on which stocks will move the most if the virus goes away. Some bullet points on that:
  • Forget the headline indices, the S&P 500 being ‘just’ 12.9% off its high should not make you wary. The S&P 500 bounce is a function of US Technology stocks. But you’re not going to be buying Amazon and Netflix for recovery, and there is plenty of opportunity underneath.
  • Sectors in the S&P 500 overnight. The message is obvious – If you think the vaccine sentiment will build you clearly buy Energy, Financials, Resources, and highly indebted credit crunch sensitive stocks like Utilities, Infrastructure, REITs. And you avoid, Healthcare, Staples, Food, Gold and any stocks that have directly benefitted from people being stuck at home (Uber, Paypal, Visa, Domino's Pizza). This is a table of the US sectors overnight. This is simple stuff. If you want to play recovery all the opportunity is in the recovery sectors.
On individual stocks that performed well in the US:
  • Airlines – Best performing stock in the S&P 500 was United Airlines up 21.1%. Delta Airlines up 13.9%. Boeing up 12.8%.
  • Travel & Leisure – Expedia (online travel) up 18.6%. Norwegian Cruise Line up 17.95% the third best performing stock in the S&P 500. Royal Caribbean Cruises up 16.7% the 9th best performing stock in the S&P 500. Carnival Corp up 15.1% (Travel Leisure).
  • Hotels & Restaurants – Marriott International up 17.38%.
  • Energy stocks – Halliburton up 17.2%. Marathon Petroleum up 15.3%. Schlumberger up 12.%.
  • Financials – JP Morgan up 5.3%, Wells Fargo up 8.8%. Citigroup up 8.9%. Morgan Stanley up 8.0%.
  • Stock Market Stocks – The investment banks. ETFs, Fund Managers.
  • Avoid – Healthcare, Staples, Technology based virus beneficiaries – Stocks that did well in the falls. Domino’s Pizza was down 3% in the US overnight, third worst performing stock. Netflix fell last night by 0.35%. Amazon was up just 0.6%. Other stocks underperforming included healthcare, big safe industrials, technology, online shopping – stocks like Gilead (COVID-19 treatment), Newmont (Gold), Eli Lilley, Bristol Myers, Kimberly Clark, Pepsico, Biogen, Abbott Labs, Paypal, Visa, Electronic Arts (gaming), Merck, Verisign.
  • Gold - Underperformed overnight. Gold is a play on uncertainty and money printing. This is the opposite.
THE BIG DECISION Cash or the market - The big thing for all investors is to get the big decisions right and the big decision in these volatile moments is whether to be in the market or not and to what extent. For those who want to factor in some virus optimism and are not traders/stock pickers, the general message is to think about your asset allocation. If you were in 100% cash this should prompt you to get more fully invested. Its your choice. We were 85% invested before today. We will be 100% in again very soon. That's our call. You have to make yours, not mine. STOCK PICKS IN AUSTRALIA Summary for a virus free world...or at least an improvement in virus sentiment: BUY
  • The stock market (get more fully invested). A lot of you play ETFs.
  • Energy. Big plays - STO, WPL, ORG, WOR, BPT, OSH (least preferred).
  • Stock market stocks - MQG, MFG, PTM, IRE, NWL, HUB
  • Financials. Lets hope banks have a sentiment improvement but unlikely to rally hard. Wouldn't be underweight yet.
  • Travel, Airlines, Tourism - QAN, AIA, SYD, FLT, WEB, HLO, CTD, EXP, REX, ALG, EVT, SLK,
  • Education - IEL
  • Motor Industry - APE, CAR, ARB, DUD, SIQ, MMS, AMA, SGF, ECX
  • Advertising - NEC, OML, SXL
  • Discretionary Retailers - LOV, HVN, JBH, AX1
  • Gaming, Casinos - ALL, CWN, SKC, TAH
  • Housing - REA, REH, BIN, GWA, DHG
  • Advertising - NEC
  • Sentiment stocks - WTC, APX, ALU (APT has probably done enough already)
  • COVID-19 damaged stocks.
  • Banks - Well down but you won't get as much bang for your buck.
  • Resources.
  • Infrastructure, Utilities - TCL, SYD, APA, AZJ, AIA, ALX, AST
  • Healthcare.
  • Food - Staples.
  • Telecoms.
  • COVID-19 beneficiaries - online anything. (KGN, APT, Z1P)
  • Big boring industrials that held up in the fall. (WOW, WES, COL).
  • A2M, FPH, DMP.
Let me throw these tables out again. The worst performers in order in the TOP 50, NEXT 50 and THE WORST OF THE REST. You can pick the opportunities from these lists. Assuming you believe any of this (!)  – And you can identify the good performers that will probably be left behind if the market recovers. key TOP 50 worst performers asx 50 NEXT 50 next asx 50 worst performers WORST OF THE REST asx worst of the rest OTHER Volatility falling: VIX volatility index S&P 500 peak reversed – suddenly looking like breaking out to the upside: S&P 500

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