3/3/2020 Fast Moving Markets
We’d like to update you with our thoughts on the markets. As we’ve mentioned, we believe this is the beginning of a bear (declining) market. We wrote the other day expressing our view that although an all clear was not sounded, we thought the market was very vulnerable to a violent rally. Yesterday we got it. Today the market continued to rally to the 50% retracement of the big move down and turned down ending the day solidly negative. We are hopeful today was only what Elliott Wave Technicians view as a B wave and that tomorrow we’ll get our final rally wave to complete the correction of the big move down. Yesterday was a day to reduce stock positions, increase cash and hedge up with inverse stock ETFs. Hopefully, tomorrow will be as well. IF WE ARE FORTUNATE ENOUGH TO GET IT, DON’T WASTE IT. You may want to put an order in tonight to do so with an idea of potentially canceling it if the market does not cooperate. Then again, with the risk to the upside, perhaps not.
In any event, we think confidence has been shaken and that prices in equities (stocks) are far too high for the erosion in confidence we expect could accelerate and cause a chain reaction to reprice stocks to the current deflationary environment at much lower levels. So again, we encourage everyone with substantial funds and who are within 15 years of retirement to have some material if not substantial amount of their funds in “cash”, the money market account, and to consider some inverse stock fund positions to partially hedge any positions in stocks you maintain. It is important to be ready to buy when markets get oversold. It’s impossible to know how things will play out, but it’s possible that if we get a scary enough drop in the near term, we could get that all-clear for an interim bottom of more significance in duration (like measured in weeks instead of days), but our view is that would have to be at lower levels. Having said that, in bear markets, surprises come to the downside. If and when we get what Elliott Wave Technicians call a 3rd wave, it could be very long, pro-tracted and scary. We cannot rule this out. Until many months have passed and pessimism reigns, we advise maintenance of some material money market funds. So increase and decrease these positions only incrementally as the waves of oversold conditions set up violent rallies to the upside to be followed shortly thereafter with lower lows.
Never the less, with the bulk of your funds in our view, should still maintain a view consistent with your holding-period holding the bulk of your portfolio (55% to 75%) in appropriate target-date retirement fund or better yet, the Cabana Conservative Fund for those with 10 years or less and all others to the Cabana moderate. The risk of being too conservative is that you fail to get back in should a rally be the beginning of a new bull market and you miss out entirely. While we judge this a very unlikely probability, we have no crystal ball. You may also consider an allocation to some or both the Cabana and the appropriate Target-Date fund that corresponds to your year of retirement. Give me a call if you have any questions.
OPPORTUNITY. There is one market that has been rallying like no one’s business. Bonds. Especially treasuries (US government debt obligations), though junk bonds have been taken to the cleaners (there are none in your portfolio options). This shows serious stress in debt markets and underscores the risk to the downside in stocks. Another reason to believe more pain is in store for stocks is the fact that stocks fell despite the Fed’s 50 basis point emergency rate cut announcement. We think the markets view corresponds to our own that it’s not about rates, its about the Corona Virus fear and its probable impact sales and production. Once the confidence goes, so does the earnings and with its stock prices. This can be a self-reinforcing cyle that will likely persist until stocks overshoot to the downside. We strongly encourage you to consider reducing your bond positions and hedging them with the Inverse Long Dated Treasury fund. Remember, all inverse funds are NOT to be held long term. Look for exits as your inverse positions have done their job. Treasuries could continue to rally especially if stocks continue down, but once selling pressure in stocks subside and buyers come in for stocks, treasuries are very likely to sell off.
While we think there should always be some allocation to precious metals, despite today’s rally, which we sold, we think exposure in precious metals should be minimal at this time, albeit still present. Once we see some pessimism set in precious metals, we’ll do our best to let you know so you can consider a period of accumulation.