Weekly Note - April 22, 2020


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:
  1. 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.  
  2. Switch to a less aggressive model portfolio.
  3. 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.  
Options 1 & 2 are described in the link:  https://marketresilience.blogspot.com/p/changing-portfolio-aggressiveness.html

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.