SPY: Why Are Investors Fighting the Fed?

(Please enjoy the latest investment insights from the Reitmeister Total Return portfolio).

The ideas discussed below were going to be part of the weekly commentary on Wednesday. But in this fast moving market that is just letting too much time go by without sharing the insights.

The short version of the story is that more downside is likely in the offing. That is why I am glad we didn’t take the bait on the Friday’s rally because our hedge produced a +2.88% gain today while the S&P fell 12%.

Sure the market will continue to be volatile with more big up days mixed in. However, until we can start to see some signs of mitigation on the virus, then the stay at home trend…and everything closed trend…and the stock market in the toilet trend…will continue.

Back to the longer story. I bet a lot of you are scratching your head as to why the market tanked so hard today after the Fed slashed rates to zero including a new round of quantitative easing valued at $700 billion??? Meaning it seems odd given the typical advice: “Don’t Fight the Fed”.

That’s because this move signals that the Fed believes the world is falling apart. Kind of similar to the actions taken in the wake of the Financial Crisis in 2008. Not that we were unclear about how bad things were beforehand, but it does show us that even the most level headed economists are scared silly.

Plus let’s look at the history of Fed actions at time of crisis and how long it really took to stem the tide of stock market losses. I spent some time Sunday researching the timeline of Fed/Treasury actions in the wake of the financial crisis in 2008. And here is the same for 2009. As you will see it took quite a while to really calm nerves as we didn’t find bottom on the bear market til March 9, 2009. That includes shrugging off the $700 billion bailout packaged announced on October 3, 2008.

And then you have zero interest rates on December 16th & TARP bailout package December 19^th. This did have some temporary benefit for stocks at first. Unfortunately that proved to only be a temporary detour as stocks tumbled another 30% from that little peak to the March valley.

3 STOCKS TO DOUBLE THIS YEAR

To me it says we need more time for investors to assess the true damage to the economy. And until that is a tad more clear, then downside makes more sense than upside.

Or let me put it another way. My two daughters are home from school for the next month. 2 weeks for Spring Break, then 2 weeks of e-learning. After that their respective schools (local high school and Northwestern University) will determine if folks can come back to school.

I told my daughters that 2 month minimum is the likely stay at home period. And more likely they will not be going back to physical school this year. That truly stinks for my senior in High School, Mandy, as this affects big life events like prom and graduation.

Back to the main point. If everything was already in the process of being closed when we only had 1,000 to 2,000 confirmed cases in the US…and now we have 4,349…and next week closer to 10,000…and then 20,000 and then ???

Do you really believe that we will be back to business as usual in a month? Or two?

So yes, this is temporary…but it may be a lot less temporary than folks currently believe. And thus all the more potential damage to the economy and stock prices.

But given how low rates are. And given the truly unknown course of the virus. Then we may not be that far from bottom. We just may bump along bottom for a long while. Thus, I think our hedge is still the right call.

It certainly did the trick today. Sure it’s easy to see the big gains in the inverse ETFs. But also all the long positions fell less than the market average. Add it together and you appreciate how the +2.88% gain was created.

The point is that I have no need to get more aggressively short at this moment. The hedge seems plenty conservative enough and hard to complain with the gain when most everyone is experiencing so much pain.

What to Do Next?

TZA is just 1 of 3 inverse ETFs that I am using in the Reitmeister Total Return hedged portfolio. In fact, I highlighted that ETF in the article I posted yesterday: The Stock of the Week Is ???.

These downside insurance policies are a big part of my current hedged strategy that actually produced a +2.88% return on Monday while the market sank 12%. It is not too late to get on board this strategy if you have not protected yourself already.

Going forward I will look for spots to emerge from the hedge by buying more and more undervalued stocks for the eventual return to a bull market.

I know its crazy out there. And I am trying my best to help investors make sense and profit from the situation. The best way for me to do that is give you 30 days access to the Reitmeister Total Return.

This is my newsletter service where I share more frequent commentaries on the market outlook, trading strategy, and yes, a portfolio of hand selected stocks and ETFs to produce profits whether we have a bull…a bear…or anywhere in between.

Just click the link below to see 5 stocks and 4 ETFs in the portfolio now, and all the future trades as we find bottom on this bear and the new bull emerges.

30 Day Trial of Reitmeister Total Return

SPY shares were trading at $248.26 per share on Tuesday morning, up $8.41 (+3.51%). Year-to-date, SPY has declined -22.87%, versus a -22.87% 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...