The onset of the Coronavirus and subsequent bear market came fast and furious. So after 3 weeks of intense downside pressure it made sense to have a relief rally in late March.
But let’s be honest with ourselves. 7 weeks and 700+ points later this bounce has gotten way out of control. In fact, I will go on record to say that there is no sane argument for buying stocks at current levels.
That is why Friday May 8th I officially made the switch to net short in the Reitmeister Total Return portfolio. In fact, I am officially 32.5% short the stock market.
Below I will share more of the logic behind that move. Plus details on the 7 positions in my portfolio that are ready rise to as the market heads lower once again.
Why Still Bearish?
Howard Marks of Oaktree Capital said it best: “We’re only down 15% from the all time high…it seems to me the world is more than 15% screwed up”.
To me that is an understatement of the decade when you consider the roll call of bad news that keeps coming across our screens including:
- 33.5 million jobs lost in the last several weeks and will likely rival Great Depression level 25% unemployment when all is said and done.
- And most every economic indicators is flashing all time record lows from manufacturing to services to consumer sentiment to (fill in the blank) report.
- This is not just a US problem…but a worldwide problem. For example this week the Global Services PMI report stands at 24.0 when 50 = breakeven. And for as bad as that is the Eurozone is at a DOA level of 12.0.
- It took airlines 6 years to recover from 9-11 and lost $60 billion in that stretch…how long will it take this time?
- The rate of new virus cases in the US is not really on the decline as it is in some other nations (Ex. Germany and South Korea). In fact, it continues to stay at a very high levels with new records recently made. So it is hard to say that the virus is fading away. In fact, it is lingering around at alarming levels.
- There NEVER has been a V shaped bottom in bear market history. The closest we ever came was 1987 where we had several retests of bottom over a 3 month period before the market finally recovered.
This list could truly be endless with the horror show of scary economic details. But I can already hear some bulls saying that this is all ancient history. That the market looks ahead 4-6 months and it is rallying because of the expected recovery. So let’s tackle that false notion.
- Start with the 33.5 million jobs lost noted above. Now consider the vicious cycle of the economy where loss of jobs > loss of income > drop in spending > lower profits > more cost cutting…like lower jobs and the vicious cycle continues lower. In fact, the average bear market lasts 13 months because of this downward progression. So to believe we will truly be expanding 4-6 months from now is unlikely. And thus to rally now is too early and unwise.
- Re-Opening the economy is leading to an increase in coronavirus cases in the states that have opened early. This will lead other states to be more cautious in their approach. It also shows the precarious nature of any potential economic rebound.
- Note that rebounding from the current dormant economy is not the same as REAL economic growth that produces earnings growth and higher share prices. So yes, the 2nd half of 2020 will likely be better than the first half. But it still will point to a recession year over year versus 2019 levels which is still bearish for stocks.
Now I ask you to push all the unproven economic models aside. Because there is no model that can properly predict the path of the virus. Nor all the wide reaching economic impacts. For this moment, lets just use a dash of common sense.
How often do you think the average US citizen will do the following in coming months?
- Travel on a plane, train, bus or cruise
- Stay at a hotel
- Go to a restaurant, bar or casino
- Buy tickets for movies, concerts, or sporting events.
- And every other form of economic activity that involves being around lots of other people.
To be clear, ANY decline in these behaviors from the norm = economic contraction = recession and bear market continues.
Read the above section again and again so it really sinks in. Because this is the part many other investors are missing as they are falsely focused on improvement over the non-existent economy of the last few months.
Truly, even a modest 5-10% decline in these vital industries from normal levels will be harmful to the economy. And I think we all know that many of these areas will continue to see much harsher declines than just 5-10% from the past. And that begets lower profits > cost cutting > more jobs lost. Yes, that vicious economic cycle noted above which is the reason why the average bear market last 13 months…and this situation seems a bit worse than average don’t ya think?
Which brings us back to why it is very hard to believe that we found bear market bottom just 3 weeks into this cycle. Which brings us back to…
My Strategy to Go 32.5% Short the Market
At this stage of the game this bear market rally should run out of steam by the time it hits 3,000. First because that is a point of serious psychological resistance. And second because that is exactly where we will hit the 200 day moving average which is the long term trend line. It will be very hard to press above without investors being truly convinced that the new bull market is in hand.
On the other side of the equation, there has never been a V bottom in bear market history. And typically you retest bottom, and often find lower bottoms, before the bear is all said and done. So that says we are likely to make our way back to 2,200 achieved in March…and perhaps much lower.
When you balance out risk and reward it points to being bearish at this time. Which led me to make several trades on Friday afternoon that bring me down to 32.5% short the market. This portfolio includes:
- 3 stocks uniquely attractive in this sluggish environment
- 1 Gold ETF because when there is a crisis and the world governments are in a race to devalue their currencies, then gold typically rises.
- 3 Inverse ETFs to mop up profits on the downside. And no, shorting the S&P 500 is not one of the selections. That is too conservative. These 3 inverse ETFs will gain much more as the market tumbles.
If you would like to see more of my market commentary and the hand picked portfolio of 3 stocks and 4 ETFs to profit as the market heads lower, then learn more by clicking below.
Wishing you a world of investment success!
…but everyone calls me Reity (pronounced “Righty”)
CEO, Stock News Network and Editor, Reitmeister Total Return
SPY shares rose $0.89 (+0.30%) in after-hours trading Friday. Year-to-date, SPY has declined -8.61%, versus a -8.61% 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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