The 9.4% rally Tuesday was impressive. And many of the most oversold groups saw even more tremendous gains.
However, investors are wise to be hesitant at this time. That’s because there have been many false rallies over the past month that only fizzled before making even lower lows.
On the other hand, there is a case to be made that bottom may be in. So we owe it to ourselves to contemplate the merits of that argument.
Below I will do just that in presenting the bull and bear case at this time followed by my recommended trading strategy.
The Bull Rally Case
Let’s first consider that the average bear market falls 34%. That is exactly where this bear market stood after Monday’s close at 2,237 for the S&P.
Next we see that the Fed and government are moving faster to the rescue than they did after the Financial Crisis. And the size of the response is even larger. (Yes, the deal was not officially done when I wrote this article…but we all know it will be signed into action soon enough.)
Next is the idea that China and South Korea were able to mitigate the rise of the coronavirus at around the 3-4 week mark. So it is possible that the US finds the same pathway out from under the health crisis.
Next we have to remember that investing in stocks is also based upon your alternatives. In this case cash is paying virtually nothing. And Government bond rates plummeting below 1% are not much better.
When you add all these things together it makes a plausible case for this bounce to be the beginning of the next bull market. However, we should first consider the bear case before making our final judgement.
The Bear is Still in Charge Case
Let’s start by first refuting some of the bull theories shared above.
Yes, the average bear market falls 34%…but this does not feel like your average bear given how the economy has basically been turned off. And there is no clear sign when it will restart. So it is likely the depth of this bear is much greater than a 34% decline.
Plus the average bear market lasts 13 months because it comes hand in hand with a recession. In this case we are only in month 1 and have not even begun to see the full extent of the job loss and economic damage. No, we don’t need to make it magically to 13 months. But 1 month is probably not long enough to find bottom.
As for the Fed and Government stimulus plans they are pretty much a given. And during the Great Recession of 2008/2009 most of the stimulus plans were rolled out between October and December and yet we did not find bottom til March 2009. So it takes a while before they really kick in and provide benefit to the economy and stock prices.
As for falling bond rates making stocks all the more attractive to long term investors…that is a nice backstop. But the one failing of that theory is that earnings (and earnings growth) are really the main components of stock prices. And thus any ensuing nasty recession would cripple the earnings outlook and with it point to lower and lower stock prices before investors thought they were truly a worthwhile value.
Yes, China and South Korea showed great vigilance to suppress the virus outbreak early. But let’s be honest, most of the US had its head in the sand for the first 7-10 days. So we are playing catch up and that is why, as we approach the 3 week mark, new daily cases continues to rise at a blistering day over day pace.
So unfortunately the path of the virus in the US may grow much steeper before we finally hit the tipping point and head lower. And yes, the longer it goes on…the more the economic damage…the more the stock market damage.
Which Case is Stronger: Bull or Bear?
Both the bull and bear case are plausible. However, there is still much more merit in the bearish argument that says to sell this bounce (just like all the other recent bounces) and prepare for lower lows.
The key to what happens next is the growth of the Coronavirus. The wider spread it becomes…the more fearful the population…the harder it is to get back to business as usual…the greater the economic destruction…the lower stock prices will go (no matter how much stimulus they throw at the problem).
So yes, we need to watch those #s closely. Because any sign that we are turning the corner like China and South Korea…then we will want to get bullish in a hurry.
I believe that a hedged portfolio is the perfect answer at this time. Especially one that combines the right blend of conservative stocks along with inverse ETFs that rise as the market falls. This is a safe place to be in this market.
But is also a profitable place to be. That is because the hedged portfolio I constructed for the Reitmeister Total Return portfolio actually generated a +5.13% return last week while the S&P tumbled -14.97%.
The bounce on Tuesday is like a reprieve from the Governor. It allows many of you, who have not already taken proper precautions with your portfolio, to set things up now for the likely downside that still lies ahead.
If you have navigated these choppy market waters successfully…then you are all set.
However, if you a struggling to find the right answers at this time, then get started with a 30 day trial to the Reitmeister Total Return.
There you will see the current hedged portfolio of 5 defensive stocks and 3 inverse ETFs that are generating profits as the market falls to yet lower lows.
And then over the next 30 days you will get ongoing commentary and updated trades to find more ways to carve profits out of this unique market environment.
Then down the road we will start loading up on the best stocks at tremendous discount prices for the eventual emergence of the next bull market.
By the way, the next commentary with updated market outlook, strategy and picks will be emailed tonight, Wednesday 3/25 @ 7pm ET. So now is a great time to started. Just click below.
Wishing you a world of investment success!,
…but everyone calls me Reity (pronounced “Righty”)
SPY shares rose $1.45 (+0.60%) in after-hours trading Tuesday. Year-to-date, SPY has declined -24.45%, versus a -24.45% rise in the benchmark S&P 500 index during the same period.
About the Author: Steve Reitmeister
Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks. More...
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