A Note of Optimism,
Trading Analysis March 13, 2020
We wanted to share a note of optimism during what has been a significant national moment, and a significant stock market decline. Anyone who has invested for more than a few years has experienced drawdowns in their stock portfolio; it is a natural part of investing. What has been disconcerting for all of us is the swiftness of the present market decline, combined of course with a growing sense of worry over the coronavirus, as it spreads in the US.
We will save the latest case counts and related developments for the next Quick Comment that we send you. But what we are seeing, in real time, is that the public is taking the infection threat with increasing seriousness. The word is getting out; people are mindful of hand and face hygiene, of personal distancing, and as the shelves at any grocery store will confirm, they are stocking up.
Businesses are stepping up as well. Companies are encouraging remote work, are splitting staffs across locations, and in many cases are providing expanded benefits for persons who are sick and need to stay home, away from others. Many companies have made the difficult decision to restrict employee travel, which could hurt business in the short term. Nationwide, large conventions and gatherings have been cancelled. Disney will be closing its parks in California and Florida for a time. All major professional sports seasons are on some degree of suspension. March Madness is cancelled, and the Masters is indefinitely postponed. These are historic, almost unimaginable, steps we have taken.
Government is getting better. At the federal level, we made smart, early decisions to restrict travel from China and Iran, two early virus hotspots. It was a good call, and it certainly slowed the virus’ progress into the US. But we’ve been hampered by the scarcity of test kits, and that situation is only slowly improving. Better have been states and localities, dealing with the front lines of the breakout. In the main, they have been fully engaged with planning for both the current and the potential situations the outbreak may present. Recall, the biggest imperative is to slow the progress of the coronavirus, so that critical care systems in our country are not overwhelmed by a surge of the sick all at one time. Drs. Anthony Fauci and Scott Gottlieb (the former FDA Commissioner) have been commendable in their counsel to the nation—steady, measured, and serious.
The current and pending disruptions to our economy will almost inevitably drive a downturn. The decline in our stock market has anticipated the weaker economy; that is the continuing moment we find ourselves in now. Our current expectation is that the recession will be comparatively mild.
The downturn has been triggered by a classic “black swan” event which delivered a short but sharp shock to the global economy. In the US, we are entering this moment from a strong footing. We will give something back in the form of job losses and lower commercial activity, but we should recover vigorously as we move beyond the coronavirus outbreak. Corporate profits will fall for a time, before resuming higher. As for the source of all this disruption, the coronavirus, by next year we should have vaccines and therapeutics available to address the disease, as well as gains from herd immunity.
We continue to plan our path forward for our clients. The market’s selloff has presented multiple investment opportunities which we are continuing to investigate. Moments like the present are thankfully rare, but it is not often that great, blue-chip franchises go on sale. We expect to be picking up some great companies for our investment portfolios in the coming days and weeks, for your benefit.
tradinganalysis failed to raise loud alarm bells of caution early on (“no bear market in the cards”), and I first cited the severe downside risk of CV being a “black swan” market destructive situation in my comment on March 1. That (or even before, after the initial completely irregular giant overnight gap down off the top) was the time to exit all investment longs.
Now, after an initial bear market thrust down, you are continuing with an “optimistic”, even bullish theme. “Pick up some great companies for our investment portfolio in coming days and weeks”, and “a short but sharp shock to the global economy”.
That outlook flies in the face of historical analogues, and in the face of the situation on the fundamental side. Based on historical analogues, a move of this depth and momentum is NEVER complete at this point. There are MONTHS of at least mild sideways/down action, and much more likely one or several more waterfall moves down in the short and intermediate term future. This view is supported by first, the fundamental fact that the spread of CV is only starting to get rolling. “The US is 3-4 weeks behind Italy” is one potent quote, along with the estimates of experts that CV could infect large percentages of the world’s population before it subsides (30% to as high as 70%). Another potent quote from a economic analyst: “the US economy is just going to shut down in April”.
Now add to that the precariousness of a vast swath of US companies: they are debt zombies, and the revenue impact of this CV induced recession is likely to cause a vast wave of bankruptcies. The corporate bond market has crashed in anticipation of this (LQD and others) in an otherwise wholly unnatural manner.
Hence, the idea that this is over or close to it and it’s now or soon time to buy as an investor (vs. a short term trader) is simply a tremendous error, just as holding on to investment longs as this started up was a tremendous error. I suspect we are looking at a final low sometime in 2021. Bear markets take time to play out, and the economic impact of CV isn’t going to suddenly halt over the next few weeks. It’s going to grow and spread for months and months, at the very least.
I could be wrong; it’s a probabilistic game, the future is unwritten and cant’ be “predicted”. But the evidence says the probabilities are strong on a much longer and deeper bear market here. If you have different evidence (and I don’t mean a relatively bullish EW model, that not evidence, that’s just a model at some level of probability), show it and explain it please.
Bottom line: the CV spread rate has to peak and start dropping before any kind of recovery can begin (monitor coronavirus.app “global” page for the daily new infections curve; it’s clearly in it’s early exponential phase now), and before that happens, there’s vast economic damage that is occurring and will broaden and deepen. This is a time for the “investor” be patient and wait for a final blow-off bottom, and then solid indications of a renewed bull trend. We aren’t close to that yet…”most likely”.
I believe Todd Gordon was so bullish at the top that he said he was fully Long and had no Stops in place to protect his capital on the downside, because he didn’t think there would be any downside and the market was going to keep going up for years.
At the same time, EWI was pounding the table on a major bear market coming and pointing out the extremely bullish investor sentiment, which Gordon was caught up in.
Truly amazing.
Just like in 08 I made a lot of money with EWI on their recent call I used OTM put options. EWI also helped me require the nature that is needed to be a successful player with proper money management. With put options I probably made more money in 08 & the recent crash so far then I made over my last 40 years working.
In my comment on 27 Feb in the video that Bennett showed, it was clear that we were going down. Next day…28 Feb, we crashed. Following week…another huge down week. And then just on 16 March…largest single drop.
To have this email of optimism is downright unethical. To tell your clients that this is the time to pick up some assets, is morally deficient.
As Kevin and John have said in the previous comments, y’all need to step back…re-analyse your analysis….figure out why you were so wrong….and then make up your client’s money back.
In times like this is where the truly great traders / educators stand out. Unfortunately, y’all aren’t in that category. To use ‘black swan’ and ‘unprecedented’ and ‘no one knew this would happen’ are just excuses.
(In the interest of full disclosure, I have been an EWI subscriber since 2008. I only recently began following TradingAnalysis.)
The idea that EWI is the single source of truth, as was hinted at above, is simply misguided. In fact, EWI themselves changed their wave count. They had the all time highs as being a Grand Super Cycle V and Millennium 1. By that count alone, it suggested that the correction we are in now was going to be an A-B-C of Millennium 2. They changed that outlook, as is their right and obligation. Now, the all time highs are being counted as Grand Super Cycle III. That count not only means we are in a correction (Grand Super Cycle IV), but that there is going to be a Grand Super Cycle V that will take us to new all time highs. New. All. Time. Highs. That’s one heck of a turnaround in their outlook. I read no mea culpa from Bob Prechter or EWI when they changed their count. I don’t even remember reading them pointing out their change in count in any particularly obvious way. One could almost say that EWI’s change in wave count (it occurred around the end of 2019 to the beginning of 2020) itself brings a note of optimism due to that Grand Super Cycle V that’s waiting in the wings.
Let’s remember, as stated in a previous comment, that there are no certainties, only probabilities. When times and/or circumstances require it, Elliotticians change their wave count. Its their obligation and one reason many Elliotticians track multiple alternate counts.