This post was originally written on Sunday, March 15th, 2020.
No matter what, you can't go wrong with lots of cash at the moment.
If the rally we saw on Friday afternoon 3/13/2020 fades, investors will be in a lot of pain in a hurry. In other words, if instead of a true bottom, V or otherwise, and the start of a lasting up leg turns out to be a return to the down trend, we may be at the starting point of a major bull trap. Smart investors should prepare for both scenarios and be ready to act accordingly, as things could go either way.
Global stock markets have been pummeled by the coronavirus and the situation on the ground, especially in Europe, where events seem be spiraling out of control, and in the U.S., which may be on the cusp of a large increase in cases as more testing is implemented. Moreover, while things can certainly get worse all around, the market was extremely oversold as of last week, just as global central banks began flooding the world with money. This created a perfect scenario for a dramatic bottom if there was a positive event, such as the algos' apparent perception of President Trump's state of emergency press conference.
The problem is that even after Friday's rally, the news got worse over the weekend. Therefore, as we've seen before during this decline, Friday's bounce could be wiped out by Monday.
Furthermore, the daily grind and the tragedy of the coronavirus pandemic have certainly taken its toll on investors and everyday people in the Markets, Economy and Life (MEL) complex adaptive system – consumer confidence is declining, stores shelves are emptying, businesses are closing.
Certainly, much of what the future holds remains unknown as states of emergency spread across the U.S. and the world and governments deploy extraordinary measures. Still, this situation will improve some day, and there will be some sort of return to normalcy; which is why, as investors, we must look both to the present and the future.
Indeed, this is one of those times when it will pay well to consider what a wise investor once said: "It's more about the return of your money than the return on your money."
The Bullish Side
Certainly bearish sentiment, before Friday's rally, was at a point of despair as I've never seen before. For example, the CNN Greed-Fear Index registered a reading of 2 recently. That means that there was no greed left in the market and that total fear ruled. Even more impressive was the record rise in mutual fund cash ever registered as investors fled stocks. Accordingly, with so many bears around, cash piling up on the sidelines and the encouraging set of technical findings that I describe below, if this isn't a prelude to a meaningful bottom, then this time is truly different and what lies ahead is unimaginable.
Meanwhile, we are seeing blue chip company stocks being destroyed by non-stop machine selling. Thus, as investors looking to the future, we must ask one question: when this is over, is it likely that company X, if it survives, will continue to flounder? Or is it more likely that its sales will increase dramatically as pent-up demand kicks in? Moreover, if management has made good decisions through this period, won't there be companies that actually thrive?
The answer to both questions is that some will continue to flounder and some will perish. Yet, there will be those companies that thrive as their products, especially after the public has had to do without them for a period of time, will be in high demand. And those are the companies which will likely lead the charge when the market rebounds.
I am developing a list of companies that meet these criteria at JoeDuarteInTheMoneyOptions.com. If you're not a subscriber yet, take a 30-day Free Trial HERE. For a perfect example of what I mean, see the section on Exxon Mobil directly below.
Exxon Mobil, with a Nearly 10% Dividend Yield, is Trading as if No One will ever Fill their Tank Again
I am in no hurry to rush out and buy stocks at the moment. But I am noticing that there are some potentially enticing prospects shaping up in the market.
For example, shares of the world's largest oil company, Exxon Mobil (XOM), have been cut in half over the last few days as investors flee the energy sector due to the global oil glut and the potential demise of OPEC after Putin's Vienna surprise. Nevertheless, as with the rest of the market, it seems as if the selling in XOM is overdone, especially when you consider the dividend yield has risen to nearly 10% due to the recent selling, and the very low odds that Exxon will cut that dividend in the near future.
Certainly, the energy sector had plenty to worry about since the recent failure of negotiations regarding curbing oil output between Russia and Saudi Arabia failed. And there may be more trouble ahead as well, given the precarious state of the U.S. shale boom, as fracking companies are increasingly vulnerable to rising debt burdens just as the price for crude has fallen and demand may be slowing due to slowing economic growth.
But this is Exxon Mobil, and it will likely survive most of what's happening at the moment, which means that once the selling abates, there may be a once-in-a-lifetime opportunity to buy the stock and to consider holding it for a while. What I'm saying is that, like Exxon, there are similar companies out there who have been decimated by an overzealous machine-traded market and that, at some point, will be bought back, likely vigorously. So, as we sit at home and wait out the coronavirus to play out, hopefully with a safe outcome for as many as possible, a good way to spend the time is to make a shopping list - and Exxon Mobil is a prototype for the type of stock that could well lead the market higher once all this is over.
Bullish Rebound or Bull Trap? Market Breadth Holds above Long Term Support
The New York Stock Exchange Advance Decline line (NYAD) found tentative support at its 200-day moving average on 3/13/2020, after making a new low for the current decline and breaking below the key technical gauge on the prior day. This reversal around the 200-day moving average occurred concurrently with the third tagging of the RSI 30 level and what seems to be a higher low on the ROC indicator than the prior low of the current decline.
When taken together, this group of technical indicators may indicate a tradable bottom, if not the absolute bottom for the current decline. This type of conclusion would be supported partially by the rally we saw into the close as the Trump press conference progressed. But it's still uncertain as to whether that was truly the bottom or just a temporary pause.
What has to happen for this bottom to hold true is that no further lows are made in the market and that a credible rally springs from these levels and lasts more than a day or two. If the market fails to shake off the bears and breaks to new lows, then it would likely negate this potential bottom and what follows could be a new set of lows.
Meanwhile the S&P 500 (SPX) and the Nasdaq 100 (NDX) indices bounced back as well. But, with both indices trading well below their 200-day moving averages, they remain in bear market territory. That said, it is encouraging that the recent lower lows in both NDX and SPX were not confirmed by lower lows in RSI, which suggests we might have seen the panic low. Still, as with NYAD, if there are new lows in the next few days for the indices, then the bears will have won the short term battle and the market will have to try again in the future.
So what is the most important thing to watch? How about the U.S. Ten Year note yield (TNX), which fell to record lows last week and began to rebound on Friday? The big question is whether this rise in yields, which means people are selling bonds, is because investors are breathing a sigh of relief or because the bond market is malfunctioning due to poor liquidity. If it's the latter, there will be bigger problems ahead.
The bottom line is that the action on Friday the 13th, 2020 was a short-term positive, but the real trend will likely depend on what happens next week.
Beware an Illiquid Market
Those who bought the market at the last hour on 3/13/2020 and kept their positions over the weekend may be rewarded in a big way - or may lose their shirts by Monday or the next few days as the worsening coronavirus news and the potential for a liquidity squeeze may again take over the markets. That's because, if this doesn't turn out to be the bottom, we'll be in the grip of a bear market rally and a subsequent, potentially worse down leg.
As a result, it makes sense to deploy some cash if the market follows through on the 3/13/2020 action, but not to be too aggressive until the all-clear signal is given. It's also a good idea for those who venture into the market to keep positions small, to use prudent sell stops and to plan for the worst, just in case. For now, the jury is still out, but those who are nimble may be able to carve out a profit in the next few days.
In The Money Options
Joe Duarte is a former money manager, an active trader and a widely recognized independent stock market analyst since 1987. He is author of eight investment books, including the best selling Trading Options for Dummies, rated a TOP Options Book for 2018 by Benzinga.com and now in its third edition, plus The Everything Investing in Your 20s and 30s Book and six other trading books.
To receive Joe's exclusive stock, option, and ETF recommendations, in your mailbox every week visit https://joeduarteinthemoneyoptions.com/secure/order_email.asp.