This is likely to be the last week of the “Wait & Prepare” season. At the end of this week, we are likely to shift to a Harvest season.
I continue to believe a less aggressive stance for your account is appropriate for the reasons reviewed below.
Market Context
As of today (April 29), the relief rally is continuing to push stock prices higher. I do not expect the recent pace of price appreciation to continue for long. As you know, last week I gave the first-ever guidance to reduce account aggressiveness by raising cash or switching to a less aggressive model portfolio. While as of today, reducing account aggressiveness has caused us to forego some returns, I continue to believe the less aggressive stance is appropriate.
Over the next week or so, investor sentiment will likely become more negative than the optimism we currently see in the stock market. As you may recall, I have mentioned that I would issue alerts, if needed, outside of the regular midweek communication schedule. I may take this step over the next weeks, but I believe the step of proactively reducing account aggressiveness will give us some flexibility around that alert and the implementation of guidance at that time.
The comments below describe the reasons for the special guidance issued last week. No new special guidance is provided below.
The Micro MRI is Moving into the Upper End of Its Cycle
As of last Friday, the cycle of short-term resilience, the Micro MRI, was at the 63rd percentile of levels over the last 100 years. It was at an extremely low level (9th percentile) just six weeks ago. A key question is: At what level does the Micro MRI for the DJIA stop moving higher and cease to provide resilience?
I estimate that during the Global Financial Crisis of 2008-9, all three of the relief rallies during that time period had Micro MRIs that peaked at levels just a week away from last Friday’s reading (assuming the average weekly Micro MRI move over the last 100 years). Of course, this time it could be different, but I believe extra caution is justified considering the magnitude of the economic problems the pandemic is causing.
Indexes that Move Opposite to Stocks are At the Lower Ends of their Micro MRI Cycles
Three indexes – namely, the US 10y Treasury bond index, a series called VIX, and credit spreads -- all have Micro MRI that are in the down-legs of their cycles and are at the lower ends of their historical ranges. These indexes move opposite to stocks; their MRI tend to move down when stocks go up (and vice versa). The indexes have been in the down-legs of their cycles for the last 6 weeks, consistent with increases in the stock market that we have experienced. The Micro MRIs for these three indexes are now at very low levels. The US 10y Treasuries Micro MRI is at the 25th percentile. VIX, a popular measure of the stock market’s expectation of variability based on S&P 500 index option (Link: https://en.wikipedia.org/wiki/VIX), has a Micro MRI that is at the 4th percentile. The credit spread index I use has a Micro MRI at the 25th percentile.
These statistics mean that these three indexes are close to beginning the up-legs of their MRI cycles. When they do stocks are likely to move lower. This information supports the view that the Micro MRI for the DJIA is at the upper end of its cycle.
Relief Rallies have Narrow Peaks, Often Occurring on a Single Day
As with other relief rallies in market history, the current relief rally is based exclusively on the up-leg of the Micro MRI – none of the other MRI are in the up-legs of their cycles and, therefore, none are providing resilience. Relief rallies tend to peak on just one day, whereas rallies based on the longer-term Macro MRI tend to have multiple peaks at similar levels over the course of several weeks or months. This means that stock prices in a relief rally tend to move higher quickly, then peak on one day, and then decline. Since the current rally has performed in a manner consistent with this general pattern thus far, I believe it is prudent to reduce aggressiveness in anticipation of the peak in the Micro MRI and hence the relief rally.
As mentioned in prior notes, extraordinarily good news, such as an effective vaccine and a fast economic recovery, could limit the stock market declines after the Micro MRI peaks. Based on historical patterns, stock prices may be flat during periods that have both no resilience and very good news, but it would be very unusual for prices to continue moving higher during a period of no resilience. As you know, the Focused 15 Investing approach does not make bets based on the assessments of such news.
For these reasons, I took the unusual step of suggesting to reduce account aggressiveness. I suspect this guidance will be in place for several weeks.
Focused 15 Investing
4/29/2020
4/23/2020
Update April 23, 2020
This note updates information I sent out last night (April 22). I have continued to review the MRI conditions of major market indexes today and want to refine yesterday’s guidance.
As mentioned yesterday, my best estimate is that the relief rally will end within a week or two. As it ends, a meaningful price decline is likely. When the Micro MRI peaks and ceases to provide resilience, the stock market will no longer have any resilience from any of the three main sources (the Macro, the Exceptional Macro, or the Micro). Thus, the market will be considered as “LEAST resilient.”
I am quite confident of this view – the math behind the MRI is unlikely to allow any resilience measure to become positive for at least several weeks. In addition, this view is supported by the MRI of other index series that are often related to stock price declines (e.g., US 10y bond index, VIX, USDJPY, CHFUSD).
The depth of the price declines during this “least resilient period” will depend on the magnitude of bad news we encounter. Considering that the global economic system has come to a virtual halt, it seems that the potential sources of bad news are plentiful. There are also potential sources of good news that can counter-balance the bad news. These include the unprecedented economic stimulus around the world, possible medical breakthroughs related to vaccines and/or testing, and measures of unexpectedly fast economic recovery.
However, as you know, I don’t try to assess the magnitude or market impact of good or bad news. Instead, we rotate our accounts based on resilience alone. While the relief rally began and moved higher as expected in the MRI resilience framework, as we move closer to the end of the relief rally, I do not believe we should wait for the algorithms to identify the end of rally in this global economic shutdown.
For all subscribers, even those with long time horizons, I suggest the following steps:
1. For Trading on Friday April 23, 2020: Do “a” or “b” below:
a. Raise cash by, say, 30%. For example, if you currently have, 3% in Box #2 of the Shares-to-Trade worksheet, enter 33%. If you currently have 5%, enter 35%. This is probably the easiest technique for reducing account aggressiveness and can be adjusted easily over time.
b. Switch to a less aggressive model portfolio.
2. At a later date (which I will identify and alert you about): Consider switching to the “Onyx Special 2020 Recovery (sg117)” model portfolio. I designed this portfolio for an extended period of social distancing. It holds technology, consumer staples, and healthcare stock ETFs. These sectors have been strong since the beginning of the epidemic and a good case can be made that they will continue to do well when social distancing is prevalent. We will get a better idea of the value of this portfolio after we see stock price behavior when the stock market is least resilient.
Options a & b are described in the link: https://marketresilience.blogspot.com/p/changing-portfolio-aggressiveness.html
Of course, you can raise more or less cash if you prefer. Also, I suspect that some subscribers with long investment horizons may decide not to raise cash at this time.
I continue to expect the second bottom of the W-shaped recovery pattern to occur in the May through July period. June may be the most likely. Also, I cannot determine at this time if the second bottom will be shallow or deep.
Please contact me at any time with questions!
- Jeff
As mentioned yesterday, my best estimate is that the relief rally will end within a week or two. As it ends, a meaningful price decline is likely. When the Micro MRI peaks and ceases to provide resilience, the stock market will no longer have any resilience from any of the three main sources (the Macro, the Exceptional Macro, or the Micro). Thus, the market will be considered as “LEAST resilient.”
I am quite confident of this view – the math behind the MRI is unlikely to allow any resilience measure to become positive for at least several weeks. In addition, this view is supported by the MRI of other index series that are often related to stock price declines (e.g., US 10y bond index, VIX, USDJPY, CHFUSD).
The depth of the price declines during this “least resilient period” will depend on the magnitude of bad news we encounter. Considering that the global economic system has come to a virtual halt, it seems that the potential sources of bad news are plentiful. There are also potential sources of good news that can counter-balance the bad news. These include the unprecedented economic stimulus around the world, possible medical breakthroughs related to vaccines and/or testing, and measures of unexpectedly fast economic recovery.
However, as you know, I don’t try to assess the magnitude or market impact of good or bad news. Instead, we rotate our accounts based on resilience alone. While the relief rally began and moved higher as expected in the MRI resilience framework, as we move closer to the end of the relief rally, I do not believe we should wait for the algorithms to identify the end of rally in this global economic shutdown.
For all subscribers, even those with long time horizons, I suggest the following steps:
1. For Trading on Friday April 23, 2020: Do “a” or “b” below:
a. Raise cash by, say, 30%. For example, if you currently have, 3% in Box #2 of the Shares-to-Trade worksheet, enter 33%. If you currently have 5%, enter 35%. This is probably the easiest technique for reducing account aggressiveness and can be adjusted easily over time.
b. Switch to a less aggressive model portfolio.
2. At a later date (which I will identify and alert you about): Consider switching to the “Onyx Special 2020 Recovery (sg117)” model portfolio. I designed this portfolio for an extended period of social distancing. It holds technology, consumer staples, and healthcare stock ETFs. These sectors have been strong since the beginning of the epidemic and a good case can be made that they will continue to do well when social distancing is prevalent. We will get a better idea of the value of this portfolio after we see stock price behavior when the stock market is least resilient.
Options a & b are described in the link: https://marketresilience.blogspot.com/p/changing-portfolio-aggressiveness.html
Of course, you can raise more or less cash if you prefer. Also, I suspect that some subscribers with long investment horizons may decide not to raise cash at this time.
I continue to expect the second bottom of the W-shaped recovery pattern to occur in the May through July period. June may be the most likely. Also, I cannot determine at this time if the second bottom will be shallow or deep.
Please contact me at any time with questions!
- Jeff
4/22/2020
Weekly Note - April 22, 2020
IMPORTANT – PLEASE READ
The stock market as measured by the DJIA is still displaying the effects of the upleg of the shortest cycle of resilience - the Micro MRI. The Micro MRI’s level as of last Friday was at the 52nd percentile of levels since 1918, which suggests that short-term resilience may be in place for another week or two, and the relief rally may last about that long as well.
Considering that we are close to the peak of the relief rally, it is time to review where we are with respect to containing the pandemic. A vaccine is many months – perhaps over a year – away. Widespread testing for antibodies is also many months away. While a month ago, there was talk about the shutdown lasting a few weeks, widespread relaxation of social distancing does not appear to be at hand.
Rather than wait for the end of the relief rally as indicated by the MRI, I think it is prudent for subscribers to identify the way they would like to reduce the aggressiveness of their accounts and begin to make the changes. I do not believe that changes must absolutely be completed this week (Friday). But use the next few days to review the options and contact me with any questions about the model portfolios, changing aggressiveness, and the mechanics of making changes.
Over the last month I have described the options for reducing aggressiveness and they are:
Of course, you can stay with your current model portfolio if you prefer. I suspect that subscribers with very long investment horizons may decide to do this.
I continue to believe the W-shaped market recovery pattern is most likely. We won’t know until we go through it if the second bottom will have a shallow bottom (with no or minimal stock market price declines) or a deep one (with large market declines). Our strategy will be the same either way – reduce aggressiveness by taking money out of stocks. At some point over the next few months (I hope) the stock market will be much more resilient and we can unwind the changes discussed above.
The stock market as measured by the DJIA is still displaying the effects of the upleg of the shortest cycle of resilience - the Micro MRI. The Micro MRI’s level as of last Friday was at the 52nd percentile of levels since 1918, which suggests that short-term resilience may be in place for another week or two, and the relief rally may last about that long as well.
Considering that we are close to the peak of the relief rally, it is time to review where we are with respect to containing the pandemic. A vaccine is many months – perhaps over a year – away. Widespread testing for antibodies is also many months away. While a month ago, there was talk about the shutdown lasting a few weeks, widespread relaxation of social distancing does not appear to be at hand.
Rather than wait for the end of the relief rally as indicated by the MRI, I think it is prudent for subscribers to identify the way they would like to reduce the aggressiveness of their accounts and begin to make the changes. I do not believe that changes must absolutely be completed this week (Friday). But use the next few days to review the options and contact me with any questions about the model portfolios, changing aggressiveness, and the mechanics of making changes.
Over the last month I have described the options for reducing aggressiveness and they are:
- Raise cash by, say, 30%. For example, if you currently have, 3% in Box #2 of the Shares-to-Trade worksheet, enter 33%. If you currently have 5%, enter 35%. This is probably the easiest technique for reducing aggressiveness and can be adjusted easily over time.
- Switch to a less aggressive model portfolio.
- Switch to the “Onyx Special 2020 Recovery (sg117).” I designed it for an extended period of social distancing. It holds technology, consumer staples, and healthcare stock ETFs. These sectors have been strong since the beginning of the epidemic and a good case can be made that they will continue to do well when social distancing is prevalent.
Of course, you can stay with your current model portfolio if you prefer. I suspect that subscribers with very long investment horizons may decide to do this.
I continue to believe the W-shaped market recovery pattern is most likely. We won’t know until we go through it if the second bottom will have a shallow bottom (with no or minimal stock market price declines) or a deep one (with large market declines). Our strategy will be the same either way – reduce aggressiveness by taking money out of stocks. At some point over the next few months (I hope) the stock market will be much more resilient and we can unwind the changes discussed above.
4/15/2020
Weekly Note - April 15, 2020
The target weights call for an increase in the allocation to stocks.
Current MRI Conditions
Stock prices have moved sharply higher over the last few weeks in a classic relief rally. The Micro MRI has been the only MRI providing resilience during this period. Since the Macro and Exceptional Macro are not currently providing resilience (and are not close to doing so) prices will likely again decline when the Micro MRI peaks in just a few weeks. This will be the end of Upleg A described below.
The Micro MRI has moved from a historically low level at the end of March and is now about the 45th percentile of all levels since 1918. This means that we are about halfway through the normal upleg of the Micro MRI. If we get a few weeks of positive returns, the Micro is likely to be at its peak.
As you can guess, staying invested in the stock market when we believe we will have another leg down is a white-knuckle time. While the MRI have historically done a good job of identifying the end of relief rallies, waiting to see if this will occur again is tense. As mentioned a few weeks ago and also below, I may issue a special alert to reduce account aggressiveness outside of the regular midweek publication if the market conditions deteriorate.
I cannot determine at this time if the second bottom in the W will be as low as the first bottom on March 23 or more shallow. If the second bottom is shallow (meaning prices do not go as low as they were on March 23rd), the buying opportunity at the second bottom will not be as attractive as the first bottom in terms of price. Some subscribers added to their accounts at the first bottom. However, waiting until the second bottom to add additional money to your investment account is probably less risky - at that time there should be far greater market resilience than there has been over the last few weeks.
End of Plant Season
Last week was end of the Plant season. We are currently in a Wait & Prepare season. In a few weeks, we will be in the Harvest season, which may be short this time around.
Market Recovery vs. Economic Recovery Patterns
You may hear on the news about V-shaped or U-shaped recoveries. In some cases, these are referring to the pattern of economic recovery as opposed to market recovery. Regardless of whether we have a V or U-shaped economic recovery, I believe that for the market recovery the W-shaped pattern continues to be most likely.
- Jeff
--------------
2020 Recovery Plan – Repeated from April 8, 2020 (with minor revisions)
The phases and steps described below are most applicable for people with investment time horizons less than, say, 7 years. For people with longer investment horizons, staying with your original model portfolio is reasonable through all these phases.
I have written that the W-shaped market recovery is most likely in this current situation. The graph below shows my estimate of where we are now. The graph is unchanged and the statements have been edited for clarity. New statements are in italics.
2020 Recovery Plan
Decline #1
Step One – First Bottom: Move to the target weights of your selected model portfolio. DONE: The alert indicating the first bottom was issued on March 25.
Phase 1 – “Upleg A” to the Peak of the Relief Rally
During this phase, adhere to the target weights of the model portfolio you used during the recent major decline. But this is not the time to try to make up for earlier declines by being more aggressive.
Step Two – Peak of the Relief Rally: I will notify subscribers when I think we are near the peak of the rally and assess the target weights of the main model portfolios. If needed, I will issue a special alert to reduce the aggressiveness of your account outside of the normal midweek note and Friday trading schedule. See this link for more information on changing the aggressiveness of your account. (https://marketresilience.blogspot.com/p/changing-portfolio-aggressiveness.html)
During this phase, review the “Onyx Special 2020 Recovery (sg117)” model portfolio prior to the peak of the Relief Rally at the end of Upleg A. I designed this portfolio to be conservative but to invest in stocks that are likely to benefit from an extended period of social distancing. It invests in technology companies, consumer staples companies (think toilet paper and toothpaste), and healthcare companies. We can think of it as the technology and toilet paper portfolio, or TnT. I have placed the prior content on a separate page with a new link: https://marketresilience.blogspot.com/p/addition-of-special-variation-of-onyx.html
Phase 2 – “Decline #2” After the Relief Rally
Maintain a less aggressive stance (using a less aggressive model portfolio or the Onyx Special 2020 Recovery sg117 model portfolio) in your account until the second bottom. If the pandemic and economic situation deteriorates further, the less aggressive stance will be appropriate for a longer period of time.
Phase 3 – Upleg B and Beyond
Step Three - At the Second Bottom - Switch back to your original model portfolio and/or reduce cash in your account to resume the original level of aggressiveness of your account. This is the buying opportunity you don't want to miss. When we get to this time, you can also consider switching to a model portfolio that is more aggressive than the one you used during the decline.
Current MRI Conditions
Stock prices have moved sharply higher over the last few weeks in a classic relief rally. The Micro MRI has been the only MRI providing resilience during this period. Since the Macro and Exceptional Macro are not currently providing resilience (and are not close to doing so) prices will likely again decline when the Micro MRI peaks in just a few weeks. This will be the end of Upleg A described below.
The Micro MRI has moved from a historically low level at the end of March and is now about the 45th percentile of all levels since 1918. This means that we are about halfway through the normal upleg of the Micro MRI. If we get a few weeks of positive returns, the Micro is likely to be at its peak.
As you can guess, staying invested in the stock market when we believe we will have another leg down is a white-knuckle time. While the MRI have historically done a good job of identifying the end of relief rallies, waiting to see if this will occur again is tense. As mentioned a few weeks ago and also below, I may issue a special alert to reduce account aggressiveness outside of the regular midweek publication if the market conditions deteriorate.
However, if you are losing sleep, you can reduce aggressiveness using the methods described on this page. Link: https://marketresilience.blogspot.com/p/changing-portfolio-aggressiveness.html
I believe you be able to make up for any lost return after the second bottom of the W. At that time, there may be more support from the MRI. Please contact me for clarification if needed.
I cannot determine at this time if the second bottom in the W will be as low as the first bottom on March 23 or more shallow. If the second bottom is shallow (meaning prices do not go as low as they were on March 23rd), the buying opportunity at the second bottom will not be as attractive as the first bottom in terms of price. Some subscribers added to their accounts at the first bottom. However, waiting until the second bottom to add additional money to your investment account is probably less risky - at that time there should be far greater market resilience than there has been over the last few weeks.
End of Plant Season
Last week was end of the Plant season. We are currently in a Wait & Prepare season. In a few weeks, we will be in the Harvest season, which may be short this time around.
Market Recovery vs. Economic Recovery Patterns
You may hear on the news about V-shaped or U-shaped recoveries. In some cases, these are referring to the pattern of economic recovery as opposed to market recovery. Regardless of whether we have a V or U-shaped economic recovery, I believe that for the market recovery the W-shaped pattern continues to be most likely.
- Jeff
--------------
2020 Recovery Plan – Repeated from April 8, 2020 (with minor revisions)
The phases and steps described below are most applicable for people with investment time horizons less than, say, 7 years. For people with longer investment horizons, staying with your original model portfolio is reasonable through all these phases.
I have written that the W-shaped market recovery is most likely in this current situation. The graph below shows my estimate of where we are now. The graph is unchanged and the statements have been edited for clarity. New statements are in italics.
2020 Recovery Plan
Step One – First Bottom: Move to the target weights of your selected model portfolio. DONE: The alert indicating the first bottom was issued on March 25.
Phase 1 – “Upleg A” to the Peak of the Relief Rally
During this phase, adhere to the target weights of the model portfolio you used during the recent major decline. But this is not the time to try to make up for earlier declines by being more aggressive.
Step Two – Peak of the Relief Rally: I will notify subscribers when I think we are near the peak of the rally and assess the target weights of the main model portfolios. If needed, I will issue a special alert to reduce the aggressiveness of your account outside of the normal midweek note and Friday trading schedule. See this link for more information on changing the aggressiveness of your account. (https://marketresilience.blogspot.com/p/changing-portfolio-aggressiveness.html)
During this phase, review the “Onyx Special 2020 Recovery (sg117)” model portfolio prior to the peak of the Relief Rally at the end of Upleg A. I designed this portfolio to be conservative but to invest in stocks that are likely to benefit from an extended period of social distancing. It invests in technology companies, consumer staples companies (think toilet paper and toothpaste), and healthcare companies. We can think of it as the technology and toilet paper portfolio, or TnT. I have placed the prior content on a separate page with a new link: https://marketresilience.blogspot.com/p/addition-of-special-variation-of-onyx.html
Phase 2 – “Decline #2” After the Relief Rally
Maintain a less aggressive stance (using a less aggressive model portfolio or the Onyx Special 2020 Recovery sg117 model portfolio) in your account until the second bottom. If the pandemic and economic situation deteriorates further, the less aggressive stance will be appropriate for a longer period of time.
Phase 3 – Upleg B and Beyond
Step Three - At the Second Bottom - Switch back to your original model portfolio and/or reduce cash in your account to resume the original level of aggressiveness of your account. This is the buying opportunity you don't want to miss. When we get to this time, you can also consider switching to a model portfolio that is more aggressive than the one you used during the decline.
4/08/2020
Weekly Note - April 8, 2020
The markets are closed this Friday so any trading should take place Thursday (tomorrow) or Monday.
I have made a few important refinements to the weekly publications over the last few weeks and these are summarized in this link:
https://marketresilience.blogspot.com/p/i-have-adjusted-and-model-portfolio.html.
Please contact me if clarification if needed.
We have technically been in a Plant season, although the sense of crisis has overwhelmed the last several weeks. For those with a long investment horizon, this has been a good time to add money to your account. Some subscribers are doing so. The second bottom, described below, is likely to have clearer buy signals from the MRI. However, we cannot tell at this time if the second bottom will be lower or higher than where the market is now.
The comments below show where we are in the W-shaped recovery pattern and briefly discuss the recent refinements to the model portfolio lineup in the weekly publications. Links provide additional detail.
2020 Recovery Plan
The phases and steps described below are most applicable for people with investment time horizons less than, say, 7 years. For people with longer investment horizons, staying with your original model portfolio is reasonable through all three phases (1,2, and 3).
I have written that the W-shaped market recovery is most likely in this current situation. The graph below shows my estimate of where we are now.
I have made a few important refinements to the weekly publications over the last few weeks and these are summarized in this link:
https://marketresilience.blogspot.com/p/i-have-adjusted-and-model-portfolio.html.
Please contact me if clarification if needed.
We have technically been in a Plant season, although the sense of crisis has overwhelmed the last several weeks. For those with a long investment horizon, this has been a good time to add money to your account. Some subscribers are doing so. The second bottom, described below, is likely to have clearer buy signals from the MRI. However, we cannot tell at this time if the second bottom will be lower or higher than where the market is now.
The comments below show where we are in the W-shaped recovery pattern and briefly discuss the recent refinements to the model portfolio lineup in the weekly publications. Links provide additional detail.
The phases and steps described below are most applicable for people with investment time horizons less than, say, 7 years. For people with longer investment horizons, staying with your original model portfolio is reasonable through all three phases (1,2, and 3).
I have written that the W-shaped market recovery is most likely in this current situation. The graph below shows my estimate of where we are now.
2020 Recovery Plan – A W-shaped
Market Recovery Pattern Appears to Be Most Likely
Decline #1
Step One – First Bottom: Move to the target weights of your selected model portfolio. DONE: The alert about the first bottom was issued on March 25.
Phase 1 – “Upleg A” to the Peak of the Relief Rally
We are currently seeing a rally in stocks, which I believe is most likely a relief rally or bear market rally. During this phase, adhere to the target weights of the model portfolio you used during the recent major decline. We appear to be midway through rally.
Step Two – Peak of the Relief Rally: I will notify subscribers when I think we are near the peak of the rally and will assess the target weights of the main model portfolios. I may give additional guidance to reduce the aggressiveness of your account. See (https://marketresilience.blogspot.com/p/changing-portfolio-aggressiveness.html) for more information on changing the aggressiveness of your account.
Prior to the peak of the relief rally, review at the following link the description of the refinements to the model portfolio lineup. This blog page gives an overview of the recent changes that will make managing the aggressiveness of your account easier as we move through the market recovery. Please note the description of the new "Onyx Special 2020 Recovery (sg117)" portfolio. I have designed this to be used in the case of a long period of economic weakness related to pandemic, social distancing and related economic weakness. Follow this link and go to the last section of the post:
https://marketresilience.blogspot.com/p/i-have-adjusted-and-model-portfolio.html
Phase 2 – “Decline #2” After the Relief Rally
Maintain a less aggressive stance in your account until the second bottom. If the pandemic and economic situation deteriorates further, the less aggressive stance will be appropriate for a longer period of time.
If the pandemic and economic situation improves more quickly, decline #2 may be muted. If the situation improves greatly, the W-shaped market recovery patten could morph into a V-shaped pattern. We will get a better perspective on this several weeks from now.
Phase 3 – Upleg B and Beyond
Step Three - At the Second Bottom: Switch back to your original model portfolio and/or reduce cash in your account to resume the original level of aggressiveness of your account. This is the buying opportunity you don't want to miss. When we get to this time, you can also consider switching to a model portfolio that is more aggressive than the one you used during the decline.
Decline #1
Step One – First Bottom: Move to the target weights of your selected model portfolio. DONE: The alert about the first bottom was issued on March 25.
Phase 1 – “Upleg A” to the Peak of the Relief Rally
We are currently seeing a rally in stocks, which I believe is most likely a relief rally or bear market rally. During this phase, adhere to the target weights of the model portfolio you used during the recent major decline. We appear to be midway through rally.
Step Two – Peak of the Relief Rally: I will notify subscribers when I think we are near the peak of the rally and will assess the target weights of the main model portfolios. I may give additional guidance to reduce the aggressiveness of your account. See (https://marketresilience.blogspot.com/p/changing-portfolio-aggressiveness.html) for more information on changing the aggressiveness of your account.
Prior to the peak of the relief rally, review at the following link the description of the refinements to the model portfolio lineup. This blog page gives an overview of the recent changes that will make managing the aggressiveness of your account easier as we move through the market recovery. Please note the description of the new "Onyx Special 2020 Recovery (sg117)" portfolio. I have designed this to be used in the case of a long period of economic weakness related to pandemic, social distancing and related economic weakness. Follow this link and go to the last section of the post:
https://marketresilience.blogspot.com/p/i-have-adjusted-and-model-portfolio.html
Phase 2 – “Decline #2” After the Relief Rally
Maintain a less aggressive stance in your account until the second bottom. If the pandemic and economic situation deteriorates further, the less aggressive stance will be appropriate for a longer period of time.
If the pandemic and economic situation improves more quickly, decline #2 may be muted. If the situation improves greatly, the W-shaped market recovery patten could morph into a V-shaped pattern. We will get a better perspective on this several weeks from now.
Phase 3 – Upleg B and Beyond
Step Three - At the Second Bottom: Switch back to your original model portfolio and/or reduce cash in your account to resume the original level of aggressiveness of your account. This is the buying opportunity you don't want to miss. When we get to this time, you can also consider switching to a model portfolio that is more aggressive than the one you used during the decline.
4/02/2020
Weekly Note - April 2, 2020
I believe we will be in a more
protracted economic hibernation than seemed likely just two weeks ago. I
outline my understanding of “Virus Time” in the link below on Three Scenarios.
With this extended timeline, it may
make sense for some subscribers to reduce the aggressiveness of their accounts
while we move through the early parts of the slowdown, even if we have not
reached the end of Upleg A as I describe below.
This note discusses:
- Where we
are in the “W-shaped” market recovery pattern
- A review
of recent model portfolio performance compared to the DJIA and funds
offered by Vanguard and the Russell Investment Group.
- Additional
research notes. These are not
required reading but will give you an idea of things I have been working
on. These include notes about three
different economic scenarios, a brief comment about responding to
rapidly appearing signals outside of our regular weekly trading pattern,
and a few additional points about valuation changes in past declines.
The W-shaped Market Recovery
Pattern
In my earlier note (https://marketresilience.blogspot.com/2020/03/update-march-22-2020.html)
I described the W-shaped pattern as the most likely. I continue to
believe that is the case. I believe we have already experienced the first
bottom of the W and are now in “Upleg A” mentioned in the earlier post.
It appears that Upleg A may continue for a few more weeks. However, the
DJIA may move down toward the level of the first bottom before it ends higher -
the path is not always higher each week. The second bottom is likely to occur
May through July; this is the buying opportunity you should take advantage of.
Below are recommended steps for
moving through these points in the W-shaped recovery pattern. These steps
are most applicable for people with investment time horizons less than, say, 7
years. For people with longer investment horizons staying with your original
model portfolio is reasonable through all these steps:
- First
Market Bottom – If tolerable, move to the target weights of
your selected model portfolios. DONE: The alert about the first bottom was
issued on March 25.
- At
the End of Upleg A – This occurs at the middle peak in the W.
When this time comes, consider reducing aggressiveness of your account by
increasing the amount of cash in your account (increase the amount in Box
#2 on the Shares-to-Trade worksheet), or switch to a model portfolio to
the left of the one you have been using. See (https://marketresilience.blogspot.com/p/changing-portfolio-aggressiveness.html)
for more information on changing aggressiveness.
- We
are currently prior to the end of Upleg A. Based on the likely
scenario I link below, our period of high economic uncertainty and damage
will continue for several months. Bad upcoming mortality and economic
headlines will probably dampen the relief rally over the coming weeks.
This makes identifying the precise end of Upleg A more difficult. If the
uncertainty and variability of the current situation are intolerable, you
can reduce the aggressiveness of your account and still have time to move
to a more aggressive stance as the markets and economy emerge from hibernation.
Of course, you are free to use any model portfolio on the publication at
any time.
- I
will still try to identify the end of the relief rally as described
above.
- Second
Bottom – At this point switch back to your original model
portfolio and/or reduce cash in your account to resume the original level
of aggressiveness of your account. This is the buying opportunity you
don't want to miss. When we get to this time, you may see that moving to a model
portfolio that is more aggressive than the one you used during the decline
is appropriate.
Recent Model Portfolio
Performance
The link below shows how popular
Focused 15 Investing model portfolios performed over various recent time
periods. The tables show that even though the declines were significant, the
Focused 15 approach still performed favorably compared to the alternatives listed. https://marketresilience.blogspot.com/2020/03/update-march-26-2020-not-urgent.html.
Ongoing Research
This section is not required reading, but some subscribers might be interested in these comments. As an exercise, I am evaluating
three different scenarios for the path ahead to determine what, if any, changes might be
needed in our model portfolios to take advantage of them. https://marketresilience.blogspot.com/2020/03/covid-recovery-model-portfolio.html
I am also evaluating how I can
reliably provide alerts that a change in the aggressiveness of your account
may be appropriate. I will discuss this more in a few weeks.
Finally, here is a link to additional
information on changes in valuation measures in past declines. This adds more depth than I was able to provide in my comment on valuation a few weeks ago. https://marketresilience.blogspot.com/2020/03/historical-valuation-comparisons.html
Please feel free to contact me with
questions or comments.
Jeff
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