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!