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Bull Market Recovery ?

“Bottoms in the investment world don't end with four-year lows; they end with 10- or 15-year lows. "

- Jim Rogers

​​The Portfolio

The portfolio is UP 0.27% YTD as I'm writing this post.

Our benchmark index, the S&P 500 is down -11.14% YTD.

Bull Market?

In my last post I said, "Earnings haven't come out yet, and when they do investors had better not be looking at earnings as a metric for which stocks to buy and sell. Everyone should be looking at revenues, because that will tell us who survives and who doesn't."

Since then, a few earnings have come out, most notably the banks, and investors appeared to be surprised by the lack of earnings. In fact, Citi Group (C) delivered a beat on the top and bottom line and got sold off any way. I presume investors are worried about the risk of people not paying their credit card bills and Citi Group is a big issuer.

On March 23rd the S&P 500 closed at 2,237.40, which so far has been the low and was right outside my worst case scenario (see below). Today we closed at 2,854.76. In a matter of 19 trading days we went from the basement to a level where the market is knocking on the door of my Best Case Scenario. While I've always been impressed by the resilience of the U.S. economy and markets, I hope I'm not alone in feeling like we came back a little too fast for an economy that has received the equivalent of a nuclear explosion.

  • Worst Case: we might see the S&P 500 decline further to around 2,100 - 2,150

  • Middle Case: we might see the S&P 500 level out around 2,650 - 2,700

  • Best Case: YE we might see the S&P 500 eventually rise to around 3,000 - 3,200

Bull Market Recovery? Or Bear Market Bounce?

The market bears see chaos around every corner and the bulls see nothing but green shoots and rainbows. My position as always; somewhere in between is 'usually' the right path. The stock market doesn't really know if we're having a viral pandemic or a financial crisis, or a recession, depression or anything else. If Godzilla marched up out of New York Harbor and ate Wall Street, markets would react the same, saying, "Hmmm how does this impact earnings"? My reasoning is that 80% of the U.S stock markets market capitalization is owned by large institutional investors. In addition, 70-80% of the daily volume of trading is done by high speed, algorithmic trading systems. Home gamers don't own those things, that again is institutional investors. These algorithms get tuned to look for certain kinds of information and then make trades based on those inputs. Negative information sells, positive information buys. The why isn't really important.

Right now I can make an argument that the rally we've seen since March 23rd is a bear market bounce and that the market could decline 50% from current levels. And I can make an argument that we've bottomed, and that this is a bull market recovery that will persist, albeit with a great deal of volatility. The big question is, where do we have more conviction.

Below is a chart of the High Yield Corporate bond (HYG). Commonly called 'junk bonds', this fund represents a broad market basket of corporate bonds from companies with good balance sheets. I've often looked to this as a measure of business optimism and as a way to see when one business cycle ends and another begins. My rational is simple, corporations are not going to issue bonds, and investors are not going to acquire that debt, unless both agree that the future is bright and that the business will be able to service and eventually retire those bonds.

On the far left is the Great Recession and Financial Crisis of 2008-2009. The lowest point is March 2009. The green band shows a relative range or normalcy. Prices above the green band are too exuberant, prices below are too negative. When the HYG declines well outside the bottom of the green band I'm claiming that a business cycle has ended. When it climbs back up and starts running down the middle again, we see a new business cycle beginning. It's a little hard to see, but on the far right is our current situation. We've had one decline into that overly negative space, we're likely to have one or two more.

Bullish Recovery

What I think is happening is that we're seeing a Bullish Recovery. Amid all the uncertainty investors are writing off earnings for 2020 and looking past this year by discounting all the negative information and awful data.

The stock market is a forward looking, discounting machine. Even during slow recoveries of the past, the stock market tends to recover about 12-months before GDP recovers. If you're standing still and there are fires raging and bombs exploding all around you it can be very hard to see over the next hill where there's peace and quiet. But if you're in a car doing 200 mph, all of that chaos is just a blur, and that greener pasture on the other side of the hill is easier to see. This is what the stock market does. While driven by emotion, there is little emotion exhibited by the actions of the market as a whole.

When the S&P 500 closed above 2,800 it had recovered 50% of the losses from the March lows. While history doesn't give us a playbook for the situation we're in right now, history does give us some useful, data driven rules of thumb. Since 1929 the stock market has seen 10 declines of 30% or more. Whenever the market has declined more than 30%, and it retraces 50% of those losses, we don't see the market make 'new' lows. We may see the market try to retest that low, but it's unlikely that we will see 2,200 again.

With that perspective, I'm calling March 23, 2020 with the S&P 500 at 2,237.40 the bottom.

Assuming we can start getting some part of the population back to work by mid-May or early June, I'm optimistic that the recovery will continue and we'll see the market back around it's previous high by the end of the year.

"Markets don't go to zero, Portfolio's do.

Buy quality, be patient...and look twice for motorcycles."

- Clay Baker

Stay Invested,

Clay Baker


Keep Me Honest 2020

  1. Today is a good time to carefully leg into stocks again (3-20-2020).

  2. Worst Case: S&P 500 decline further to around 2,100 - 2,150 (3-28-2020).

  3. Middle Case: S&P 500 level out around 2,650 - 2,700 (3-28-2020).

  4. Best Case: YE S&P 500 eventually rise to around 3,000 - 3,200 (3-28-2020).

  5. Market bottomed March 23, 2020 at S&P 500 2,237.40 (4-17-2020).

Clay's Rules

Rule #1: Don't lose money

Rule #2: See Rule #1

Rule #3: Portfolios go to zero, markets don't, Stay Invested

Rule #4: When a good stock you own drops 10% below your cost basis, add shares

Rule #5: Bull markets aren't sustained without the Transports

Rule #6: When Forward P/E is lower than TTM P/E, expect earnings to increase

Rule #7: When an investment bank sells below book value, buy it

Rule #8: Tips are for waiters. Do your own homework.

Rule #9: Don't sell a stock because you're bored with it. Do your own homework.

Disclosure: I am personally invested long in some or all of these stocks or funds that appear in the Stay Invested portfolio and may purchase or sell shares within the next 72 hours. I am also invested in other stocks and funds that do not appear in the Stay Invested portfolio but may be mentioned or related to this article. It is not my intention to advise or encourage the purchase or sale of any security. I am invested long in these securities mentioned in this post:


I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. This article is not intended to offer investing advice, guarantee 100% accurate predictions, or to be interpreted as providing a personal recommendation.

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