04-14-2020: Still Bullish... But...

According to the really, really, really smart talking heads, last week was the top of the blow-off bear market rally and this week is when the retracement begins as the market comes to grips with reality and an economic down-turn, the likes of which no one has ever seen. Well... maybe they will be right tomorrow, because it certainly wasn't a down market today... not by a long shot. The S&P 500 closed up more than +3%! And, my clients are loving it.

As you know (if you are a client of mine), I am in the midst of executing my "Incremental Rule", which lets me incrementally increase my bullish holdings in a bear trending market, so long as the short-term trend is bullish and is moving up from an oversold condition. Each time the market moves up, from an oversold condition by one standard deviation of normal volatility, I have the option to add another 15% in bull-biased trades to the portfolios. I have been doing that that for the last couple of weeks and am continuing to do that this week.

For Monday and Tuesday, this strategy has been working to perfection. We are way up so far for the week. But... I do wonder if this market is truly dealing with reality. While the doom and gloom crowd argue that GDP growth will be worse than anything we have seen since the Great Depression, they forget the size of the government/FED's bottomless barrel of money that they are, seemingly, willing to throw into the cogs of this totally shut-down market. I hate to admit it, but my gut tells me that the dooms-dayer's are right and this bull market is likely very short lived. But... that is just a guess, and I don't invest based on guesses.

Now, for the 3 different camps:

  • Buy-and-Hold

  • Sell-and-Sell Short

  • Ride-the-Trend-Until-It-Ends (my approach)

The B&H group are breathing a sigh of relief as the market climbs up almost halfway back to February 24. Big-time risky strategy. Totally hope based. No way to handle a retest of the lows (or worse).

The S&SS group are guessing that they are the sharpest knives in the drawer and can see the recovery will take many months, if not years, to get the economy back on its feet; and when the market realizes this, the wheels will come off this market and the collapse might make the first 30% sell-off look like a walk-in-the-park. They either are, or want to be, short this market.

And then there is my approach, where I am bullish until the market rolls over and then I go to cash until the market confirms the next down-trend and then I move in inverse ETFs. The ONLY assumptions I make are:

  1. The current trend in the market will last until it doesn't, and

  2. Trend reversals can occur without warning at any time, so I always use volatility-based stops, and

  3. Money can be made in bull-trends, of course, but can also be made bear-trends by owning inverse ETFs.

It is a big, big mistake to think that anyone knows, with any reasonable level of certainty, what is going to happen to our economy and how/when it will get back to where it was back in mid-February. The market is acting like there is nothing but blue sky's and happy days ahead. That's perfectly fine with me. I love it when my clients are making good money in any market. But, common sense seems to say that this is more whistling-past-the-graveyard than dealing with reality. Frankly, I hope I'm wrong. I hope the bottom is in, as GS seems to think; and that while there may be some choppiness, the net trend is upward and onward!! But just in case that optimism is wrong, I'll keep my stops tight and raise them up every day that the market moves higher. I want my stops to get above my basis in each holding as quickly as possible.

Well... I see that the futures are ticking slightly upward for tomorrow's open, at this writing. Here's to the hope that the futures are right... but, count me just a tad skeptical.

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