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.

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

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.