Are We Ready For A Second Wave?

As we know well by now, the financial markets have recovered nicely from the initial wave of the coronavirus, at least until recently. After plunging by a third from its February 19 all-time high through its March 23 bottom, the S&P 500 has rebounded sharply, although it still remains about 10% below its record high. NASDAQ, however, has won back all of what it lost and now is solidly in the green for the year. Bond yields, meanwhile, have largely settled into a relatively narrow range, all of which signals that investors are fairly positive about the future.

Certainly, the most recent economic news has borne out that optimism. Retail sales jumped a record 17.7% in May after plunging 14.7% in April, the first increase in fourth months. Moreover, May sales in dollars were only 7.7% below where they were in February before the worst effects of the virus hit. In other words, after an extraordinary dip, spending is already close to where it was as more stores and restaurants reopen.

Elsewhere, the Conference Board’s index rose a better than expected 2.8% in May after falling 6.1% in April. Sales of newly-built homes jumped 16.6% while the National Association of Home Builders’ confidence index surged 21 points in June to 58. Sales of existing-home sales, by far the largest category, dropped nearly 10% in May, but that “reflected contract signings in March and April, during the strictest times of the pandemic lockdown,” the National Association of Realtors said, adding that “home sales will surely rise in the upcoming months with the economy reopening, and could even surpass one-year-ago figures in the second half of the year.”

While all of that is undoubtedly good news, is it sustainable? Right now, two main questions are facing the economy and the financial markets: How bad will a dreaded “second wave” of the virus be on both the nation’s health and economy and what happens now that the U.S. government’s stimulus programs have started to run out? Continue reading "Are We Ready For A Second Wave?"

COVID-19 - Capitalizing On Opportunities

Just before the COVID-19 pandemic struck the markets, Ray Dalio was recklessly dismissive of cash positions, stating "cash is trash." Even Goldman Sachs proclaimed that the economy was recession-proof via "Great Moderation," characterized by low volatility, sustainable growth, and muted inflation. Not only were these assessments incorrect, but they were ill-advised in what was an already frothy market with stretched valuations prior to COVID-19 hitting the markets. The COVID-19 pandemic was a true back swan event that no one saw coming as far as its abruptness, scale, and impact. This COVID-19 induced sell-off was the worst since the Great Depression in terms of breadth and velocity of the sell-off.

The S&P 500, Nasdaq, and Dow Jones shed a third or more of their market capitalization through late March 2020. Some individual stocks lost over 80% of their market capitalization. Other stocks were hit due to the market-wide meltdown, and many opportunities were presented as a result. Investors were presented with a unique opportunity to start buying stocks and take long positions in high-quality companies. Throughout this market sell-off, I took long positions in individual stocks, particularly in the technology sector and broad market ETFs that mirror the S&P 500, Nasdaq, and Dow Jones. It was important to put this black swan into perspective and see through this event on a long term basis. Viewing the COVID-19 sell-off as an opportunity to buy stocks that only comes along on the scale of decades has proven to be fruitful. When using past recessions as a barometer, I started buying stocks when the sell-off reached 15% and continued buying into further weakness to improve cost basis.

Most Extreme and Rare Sell-Off Ever

Out of the 12 recessions that have occurred since May of 1937, the average sell-off for the S&P 500 was -31.6% with a range of -57% (2008 Financial Crisis) to -14% (1960-1961). The COVID-19 pandemic has crushed stocks beyond the average recession sell-off of -31.6%. The markets didn't reach the most severe sell-off levels by historical standards despite the possibility for more downside potential. Regardless, at initial recession levels of 15% declines, I began putting cash to work as that was the prudent action for any long-term minded investor. Continue reading "COVID-19 - Capitalizing On Opportunities"

Is The V-Shaped Recovery Back On?

Several months, or was it years ago; when the coronavirus began its spread across the U.S., several bullish economists were predicting a “V-shaped” recovery, meaning the expected economic recession would be deep but short-lived. The subsequent bounce-back would be extremely strong so that the 2020 recession would be a mere blip on the chart. That consensus opinion was quickly replaced by talk of a “U-shaped” or even an “L-shaped” recovery, with the economy reeling for months if not years, as the number of deaths escalated along with the unemployment filings as the U.S. economy remained shut down.

Now it’s starting to appear that maybe the doomsayers were a bit too hasty in their gloomy prognostications. While it’s far too early to predict how things will eventually play out, the V-shaped recovery may actually be a more likely outcome than the more pessimistic scenarios. Certainly, the most recent economic reports, from both the government and the private sector, are already showing a nascent rebound even as many key states – like New York, California, and Illinois – remain largely in lockdown mode and only recently started to open up. At the same time, some previous forecasts are being shown to have been overly bearish.

Probably the biggest surprise to the upside was last Friday’s May employment report, which showed the economy adding 2.5 million jobs, a far cry from the consensus forecast of a loss of 7.7 million, and April’s loss of nearly 21 million jobs. “These improvements in the labor market reflected a limited resumption of economic activity that had been curtailed in March and April due to the coronavirus (COVID-19) pandemic and efforts to contain it,” the Labor Department said. Continue reading "Is The V-Shaped Recovery Back On?"

COVID-19 - An Agile Options Strategy - Part 2

COVID-19 was the black swan event that culminated in bringing the worldwide economy to its knees. The spread of the virus globally, along with intermittent spikes, has crushed stocks and decimated entire industries such as airlines, casinos, travel, leisure, and retail while others are battling to remain in business. COVID-19 was the linchpin for the major indices to drop over 30% over the course of 22 days. This COVID-19 induced sell-off has been the worst since the Great Depression in terms of breadth and velocity of the sell-off while inducing extreme market volatility that hasn’t been seen since the Financial Crisis.

Although options trading provides a margin of downside protection and a statistical edge, when hit with a black swan event, no portfolio is immune from the wreckage. Thus, proper portfolio construction and optimal risk management are essential when engaging in options trading to drive portfolio results. One of the main pillars when building an options-based portfolio is maintaining ample liquidity via holding ~50% of one’s portfolio in cash. This liquidity position provides the ability to adjust when faced with extreme market conditions such as COVID-19 rapidly. An agile options based portfolio is essential, and the COVID-19 pandemic is a prime example of why maintaining liquidity, risk-defining trades, staggering options expiration dates, trading across a wide array of uncorrelated tickers, maximizing the number of trades and selling options to collect premium income are keys to an effective long-term options strategy.

Maximizing Return on Capital

Options can be sold with defined risk while leveraging a minimal amount of capital to maximize return on investment. Whether you have a small account or a Continue reading "COVID-19 - An Agile Options Strategy - Part 2"

COVID-19: Speculative Positions Update

In March, I published a piece on taking speculative positions given the complete market meltdown. It was as good a time as any to put on some speculation plays because this COVID-19 black swan event presented a once in a lifetime opportunity. This COVID-19 induced sell-off has been the worst since the Great Depression in terms of breadth and velocity of the sell-off. This health crisis has crushed stocks and decimated entire industries such as airlines, casinos, travel, leisure, and retail with others in the crosshairs. Now many positions have been sold at realized profits between 20%-100% gains as the market bounced back from its lows in late March.

The broader indices have shed approximately a third of their market capitalization into April. Some individual stocks directly related to the COVID-19 pandemic have lost 50%, 60%, 70% and even 80% of their market capitalization. Investors had been presented with a unique opportunity to start speculating on some of these names as sharp rebound candidates. Throughout the market sell-off, I began to speculate on a variety of names with small amounts of capital. Let's not confuse speculation for investment; thus, these trades were purely speculative for a sharp potential recovery. These names have been battered to levels not seen since the Financial Crisis. Names such as Expedia (EXPE), Wynn Resorts (WYNN), Capri Holdings (CPRI), MGM Resorts (MGM), Yelp (YELP), Yum Brands (YUM), Chipotle (CMG), Ulta Beauty (ULTA), Royal Caribbean (RCL), Boeing (BA) and Twitter (TWTR) are some speculative names that have sold off ~40%-85%.

Evaporated Market Capitalization

The COVID-19 pandemic has destroyed entire industries and many individual stocks. Anything related to travel, leisure, retail, industrials, and Continue reading "COVID-19: Speculative Positions Update"