03-31-2020: The OverSold Rule and Covid-19

As you know, I have a set of rules that I go by for every trading decision that we make on behalf of clients. These rules are built from decades of historical market data and millions of back-tests and thousands of actual trades. I often like to say that "I have a rule for every conceivable market condition."


But... that was before the current pandemic that has gripped the world like nothing before in recorded history. Never before... and I literally mean, never before... has the entire globe's economies been locked down and forced to come to a complete stop.


What's the rule for that??


Well... surprisingly, our rules are continuing to serve us pretty well. We got out of the market just two trading days before the melt-down-Monday of February 23, 2020. Why did we get out of the market and move to cash? Rules. In this case, it was the overbought rule that had triggered very, very tight stops on all of our holdings. As a result, we got out, virtually, at the top of the market. The in-it-for-the-long-haul advisors tell you (wrongly) that you cannot know when to get into and out of the market. These self-serving buy-and-hold strategies work like a champ in a bull market, but suffer massive losses in bear markets. They like to tell their clients that only the weak hands move in and out of the market. They want their clients to 'think' that they are being smart and far more intelligent than the rabble of the less informed and unwashed traders out there. In reality, these advisors are self-serving marketeers that make their money by keeping their clients invested in expensive mutual funds that pay the advisor huge sums of money (bribes, kick-backs, bonuses, etc.) to keep their clients invested in these funds. But... I digress.


When the market gets oversold, as it did about a week ago, I have a rule that allows me the flexibility to put up to 15% of capital to work in a contrarian play; a long-biased play where I can put some capital to work with a bull bias, even when the overall trend of the market is bearish. Today was the first opportunity for me to take advantage of that rule.


Currently, there are a handful of pharmaceutical companies and some service-sector companies that are nicely poised to grow in this horrid, lock-down, going nowhere economy. I have found some pharma companies that are on the cutting edge of providing potential medical breakthroughs and/or critical solutions to the Covid-19 virus that is attacking us and the world today. I have also found a great company that is in the critical goods supply chain that looks to benefit greatly from the situation where hundreds of millions of customers have to buy their food and supplies online and have those goods delivered right to their front door.


So, today, I put about 10% of the capital in our Tactical Growth model to work in these stocks.


And, while my data continue to show market is likely headed a lot lower, I have hedged the Tactical Growth portfolio with a small counter-trend investment.


My clients who have capital in any of my 5 models except ULTRA-MAX, have for the most part, asked me to err on the side of caution in this bear market. And while we are massively beating the market this year (Tactical Growth, for example, is up +6.58% in Q1, while the S&P 500 is down -20%), the risk profile of the clients following Tactical Growth, Total Market, Ultra and Diversified Income, prefer that I keep them mostly in cash until this Covid-19 war is won and the market is on its way back up. As such, I am reticent to put much risk on the table with inverse ETFs. I will put some money to work in these ETFs that are designed to move up when the market moves down; but, only gingerly so.


But, that is not the risk profile of my ULTRA-MAX clients. They want me to take advantage of every opportunity where the market data indicate a solid trend up or down... and right now those data are screaming that the market is more likely than not to move lower...perhaps a lot lower. With that in mind, I am loading up on 2x inverse ETFs in ULTRA-MAX. Could the data be wrong and the recent uptrend in the market is a harbinger of a total bullish trend reversal in the making? Absolutely. This is why the risk profile for ULTRA-MAX is only for those of stout hearts and even stouter bank accounts.


Bottom-Line: I am rules based and do my best to follow those rules even in the face of an economy and stock market, the likes of which, no one has ever seen before. I submit to you that it is a mistake to try to draw analogies to any prior market condition. We are in uncharted waters and it will take rules, discipline and nimbleness to grow capital in this new world. But, so far... we are making it happen.


Stay safe... if you're young, check in on your parents and grandparents... but don't infect them. They need you now more than ever, but they do not need the virus. My daughter (who is married and has kids of her own) called us up the other night and said they'd like to come over to visit. But, we were to stay inside on our screened-in back porch while they sat several feet away on our deck... and we just talked for hours. What a wonderful visit in the midst of us all being locked down. We kept our social distance, but also kept the family relationship strongly united. We are lucky, in that regard... and we know it.