Post Inauguration And Extended Markets

Best Post Election and Inauguration Lift

The drumbeat of markets becoming more and more over-extended is becoming louder and louder. From the election to the inauguration, the S&P 500 is up 13%, which is the best for any president since 1952. Post-inauguration, all major indices as measured via the Russell 2000 (IWM), Dow Jones (DIA), S&P 500 (SPY), and the Nasdaq (QQQ) hit all-time highs. The broader markets have been propelled higher in an already frothy market as 2021 unfolds. All major markets have been in a raging, nearly uninterrupted bull market with the Nasdaq and S&P 500 up 100% and 75%, respectively, since the pandemic low.

These moves are a function of the vaccine rollout, continued stimulus coming out of Washington, massive fiscal and monetary accommodation from the Federal Reserve, the election cycle being capped off with the presidential inauguration, and new policies aimed at spurring economic growth. Despite these tailwinds, the markets are looking overextended, as assessed by a broad range of historical benchmarks and current indicators investors should heed in the near term.

Historical Measures and Current Indicators

A recent E-Trade survey showed that the majority of investors (91%) with $1 million or more in a brokerage account believe the stock market is in a bubble or close to being in one. From a historical standpoint, markets have exceeded levels reminiscent of the Roaring Twenties and are now approaching the dot-com bubble territory. These historical comparators of options put/call ratios, the broad participation of stocks exceeding their 200-day moving average, and P/E ratios may be potential warning signs of near-term pressures. Current indicators are also suggestive of frothy markets as measured by Bollinger bands and the Relative Strength Index (RSI). Continue reading "Post Inauguration And Extended Markets"

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"

COVID-19 Opportunity - Laying The Foundation

An opportunity to begin or reinforce a portfolio foundation amid the COVID-19 pandemic has been presented. COVID-19 was the back swan event that only comes along on the scale of decades. 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. The S&P 500, Nasdaq, and Dow Jones have shed approximately a third of their market capitalization, with the sell-offs coming in at 33%, 29%, and 36%, respectively, through March 20, 2020. Since then, stocks have attempted rallies. However, these have fallen short, and the lows are being retested. Some individual stocks have lost over 80% of their market capitalization. Investors have been presented with a unique opportunity to start buying broad market indices to lay the foundation of a portfolio or to reinforce long positions without single stock risks. Throughout this market sell-off, I have begun to take long positions in the broad market ETFs that mirror the S&P 500 ETF (SPY), Nasdaq (QQQ), and Dow Jones (DIA). It's important to put this black swan into perspective and see through this on a long term basis while viewing this as an opportunity that only comes along in decades.

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 haven't reached the most severe sell-off levels by historical standards, so there's always a possibility for more downside potential. Regardless, at these levels putting cash to work would be prudent for any long-term minded investor. Continue reading "COVID-19 Opportunity - Laying The Foundation"