opening back up?

The US as a nation is beginning to relax the most severe social distancing measures put in place to make sure a tidal wave of COVID-19-infected people wouldn’t overwhelm the medical care system.

I have no idea what’s going to happen as we recover, but I’m willing to hang my hat on two ideas:

–the key issue is hospital capacity, and

–that reopening will continue, with the throttle being opened or choked back, not by the number of new virus cases, which I think will likely rise, but by the availability of hospital beds.

 

The stock market senses this policy shift and is starting to react.  “Starting” may be a bad word.  The Russell 2000–mid-sized firms with revenues and costs in the US–was down by 40% ytd a month ago.  It has risen by about a third since then, meaning it’s still down by a bit more than 20% ytd.

Banks, hotels, cruise lines, restaurant chains all show similar patterns.

Just as important, secular growth, capital flight tech names, which have been very strong so far this year (MSFT is up by 10%, for example, the ARK Genomics ETF is +20%  (I own both (btw, I really like the ARK people and own several of their ETFs)), are beginning to lose steam.  (This is really a horrible sentence.)

What to do?

This is, of course, mostly an issue of investment philosophy and risk tolerance.  For what it’s worth, I’m very aggressive, have a portfolio I actively manage, where I’m very heavily weighted toward tech.  I’ve begun to shift a tiny bit toward the names that have been crushed by pandemic fears.

So far I’ve bought a Russell 2000 ETF and established a small position in Marriott (MAR).

I’ve thought about the cruise lines, which are the swing for the fences “value” bet, and decided I don’t know enough and don’t want to take the risk.   There should be (I haven’t looked) a ton of very recent information on the SEC EDGAR site about Carnival (CCL) given the company’s recent financing, which should give prospective buyers some comfort.  But at the end of the day I can imagine taking a small-boat river cruise but I’m not a CCL customer.

I also thought about Boeing (BA), but I’m not sure I have any clue about the depth of incompetence and corruption involved in the company’s newest commercial aircraft development.  My experience suggests we’ve only seen the tip of the iceberg.  The counter-argument is that BA has a substantial defense business and that it’s one of only two major aircraft manufacturers in the world.  So it can’t be allowed to fail.  I’m passing, though.

(An aside:  the key to investment success is not to have an opinion about everything;  it’s to know more than most about a few things that you monitor carefully.)

Why MAR?  A simple answer is fewer warts than CCL or BA.  I know something about the company and use its products.  Also, by and large, publicly traded hotel companies don’t own the physical hotels.  They provide branding, property management and reservation system services, in return for taking the lion’s share of profits.  Yes, less upside than with property owner CCL, but also less risk that my ignorance will come into play in a bad way.

Assuming I’m correct about this market shift, is this just a counter-trend rally?  Yes, but…  There may be a quibble about the word “just”;  but this domestic-centric rally could go on for months.

At some point it will be important to have ideas about how the post-pandemic US will be different.  I’m not sure that’s right now, though.  I think it’s better to be trying to figure out which firms will lose their appeal in a post-pandemic world–and use them as a source of funds to play the current rally.

a bear market in time? sort of…

In the middle of a garden-variety bear market–i.e., one orchestrated by the Fed to stop the economy from running too hot–I remember a prominent strategist saying she thought the market had fallen far enough to be already discounting the slowdown in profits but that the signs of recovery were yet to be seen.  So, she said, we were in a bear market in time.

We’re in a different situation today, though:

–most importantly, we don’t know for sure how much damage the coronavirus will do, only that it’s bad and we unfortunately have someone of frightening incompetence at the helm  (think:  the Knicks on steroids) who continues to make the situation worse (while claiming we’re in the playoffs)

–with most of the seasoned investment professionals fired in the aftermath of the financial crisis, and replaced by AI and talking heads, it’s hard to gauge what’s driving day-to-day market moves

–if we assume that the US economy is 70% consumption and that this drops by 20% in the June quarter, then COVID-19 will reduce GDP by 14% for those three months.  This is a far steeper and deeper drop than most of us have ever seen before

–on the other hand, I think it’s reasonable to guess that the worst of the pandemic will be behind us by mid-year and that people released from quarantine will go back to living the same lives they did before they locked themselves up.

 

It seems to me, the key question for  us as investors is how to navigate the next three months.  In a pre-2008 market what would happen would be that in, say, six or eight weeks, companies would be seeing the first signs that the worst was past.  That might come with more foot traffic in stores or the hectic pace of online orders for basic necessities beginning to slow.

Astute analysts would detect these little signs, write reports and savvy portfolio managers reading them would begin to become more aggressive in their portfolio composition and in the prices they were willing to pay for stocks.

 

How the market will play out in today’s world is an open question.  AI seem to act much more dramatically and erratically than humans, but to wait for newsfeeds for stop/go signals.  (My guess is that the bottom for the market ends up lower than history would predict and comes closer to June.  At the same time as the market starts to rise again, it will rotate toward the sectors that have been hurt the worst.  Am I willing to act on this?   –on the first part, no; on the second part, looking at hotels, restaurants…when the time comes, yes)

A wild card:  Mr. Trump now seems to be indicating he will end quarantine earlier than medical experts say is safe.  At the very least, this will likely bring him into conflict with the governors of states, like NY, NJ and CA, who have been leading efforts to fight the pandemic.  At the worst, it will prolong and intensify the virus effects in areas that follow his direction.  Scary.

 

 

 

technical analysis: double bottom

Regular readers will know that I’m not a particular fan of technical analysis, at least as a primary tool in determining the investment attractiveness of the equity market or of individual stocks.  A hundred years ago–maybe even sixty years ago–it was the tool, because there was nothing else.  Before the SEC, company financials were a joke, and they weren’t easily available in a timely manner.  Watching the trading patterns of the “smart money” was arguably the best an average person could do.

Nowadays, the SEC’s Edgar site has all US-traded companies’ filings available for free the instant they’re made.  Most companies also have extensive libraries of their own available on their sites.  Firms now webcast their earnings conference calls for all to hear.  If you don’t feel like listening, transcripts are available for free soon afterward from Seeking Alpha.  

So it isn’t so much that technical analysis is bad per se.  It’s just that like the horse-drawn cart it’s been replaced by fundamental information that’s quantum leaps better.

support/resistance

Still, there are some aspects to technical analysis that I find useful.  One is support/resistance.  This is the idea that price levels where there has been significant past trading volume, preferably over an extended period, will act as floors to support stocks as they fall, as well as ceilings to impede their advance.  Both holding at and breaking through these levels are often significant events.  In particular…

double bottom

When the market has been declining for an extended period of time, or has dropped particularly sharply (the “magic” numbers technicians use are typically losses of 1/3, 1/2 or 2/3 of the prior advance), it often stabilizes for no apparent reason and begins a significant upward bounce (+10%?).

The fact that prices are now going up isn’t enough by itself to establish they have reached an important low.  In almost all cases (March 2009 was, on the surface at least, a significant exception–see below), stocks begin falling again within a few weeks and find themselves approaching the previous low.  If the market touches–or almost touches–the previous low but begins to rebound again (in the US, the market may briefly trade lower than the previous low–we’re daredevils, after all), this is often a strong sign that resistance is forming at the old low.  This revisiting of the low is the necessary second part of the double bottom.

There can be a triple bottom, too.  More often, in my experience, the market begins a new, upward pattern of higher highs and higher lows after the second bottom.

Fundamental conditions must also be in place for this bottoming to happen.  Stocks have to be cheap; investor pessimism must be high; the downtrend must be protracted enough for at least some investors to think that conditions won’t get worse.

In essence, what the double bottom tells us is that intense negative emotion that has been driving prices sharply (often irrationally) lower has begun to play itself out.

current examples

Double bottoms happen with individual stocks and stock groups, too.

Look at the Macau casinos traded in Hong Kong.  Some, like Galaxy Entertainment, have lost half their value over the past ten months.  But the group appears to have bottomed in late September-early October.   The stocks bounced off their lows, returned near them several weeks later and appear since then to have established a new upward pattern.

I haven’t looked carefully at energy stocks–but the oils are a group where I’d be looking for similar behavior.

the March 2009 case

The S&P 500 appeared to me to be bottoming in early 2009.  As is usual during recessions, government programs were being put in place to stop the economic bleeding.  Anticipating this, investors had pretty much stopped selling.  However, in late March investors were horrified to hear that Congress failed to pass the proposed bank bailout bill/  Some (Republican) Representatives were even saying they would prefer a rerun of the Great Depression to a bank bailout.  The S&P fell more than 7% on the news, but recovered all its losses when the bill was passed the following day.  If we erase those two trading days, early 2009 exhibits a “normal” bottoming process.

 

 

is anything “wrong” with Apple?

APPL’s extraordinary recent performance

I was talking about the stock with my brother-in-law, a big AAPL booster, a month or so ago.  I’d been fooling around with one-year performance charts, an obvious indication that I somehow had too much time on my hands.  But doing so made me realize that, as I pointed out to my brother-in-law (who probably already knew), APPL had had an extraordinary impact on the S&P 500’s near-term performance.  Over the prior 12 months, AAPL was up around 80%.  Over the same time span, the S&P was up a bit less than 4%.   But AAPL alone was responsible for most of the 4%!!

Some rough arithmetic:  AAPL probably represented 3% of the index at the beginning of the period.  3% up 80% is the same as 80% up 3%, which is also the same as 100% up 2.4%.  In other words, AAPL’s gains represented 2.4 percentage points out of the 4 percentage point advance the index made during that year.  The other 97% of the index chipped in only 1.6 percentage points.  Those stocks were basically flat.

Index dominance by one stock never happens in the US.  In emerging markets, where a single issue can be 10%-15% of the overall market, yes.   ..in the US, no.  Nevertheless, that’s what AAPL did over the past year.

Then it fell by 10%.

more numbers

Let’s take a quick look at how AAPL has performed, even after that fall.  And let’s include some of the “AAPL eco-system” stocks as well, to see how they’ve made out.

one year (through yesterday)

AAPL          +77.2%

INTC           +43.8%

QCOM          +24.7%

NASDAQ index          +8.1%

S&P 500          +3.8%

ARMH          -4.8%

 

six months

AAPL          +37.5%

INTC          +20.9%

QCOM          +20.1%

S&P 500          +11.8%

NASDAQ          +8.1%

ARMH          -1.9%

 

year to date

AAPL          +43.1%

QCOM          +21.1%

INTC          +17.1%

NASDAQ          +14.7%

S&P          +8.9%

ARMH          +0.8%

what I make of this

1.   Even after the drop of the past few days, the overall situation of AAPL outperformance hasn’t changed very much.  What has happened over the past six months, though, is that the rest of the market has begun to revive.  So AAPL’s gains aren’t as dominant as they had been when the rest of the market was drooping.

2.  The performance of “eco-system” stocks has been spotty.

Qualcomm, whose chips are in virtually every high-end mobile device, has done well.  But its performance over each of the periods above is a pale imitation of AAPL’s.

ARM Holdings, whose low power chip designs are in just about every mobile device, high-end and low-, has been left behind in the dust.  Of course, it was trading at close to 100x earnings a year ago.

Intel, the “anti-APPL,’ the “dinosaur” that ARMH was going to put out of its misery, has been second on the one-year list.  Or course, it was trading at 9x earnings a year ago and yielding close to 4%.

3.  A counter-trend movement, where AAPL goes down and the rest of the world catches up a bit, wouldn’t be the least bit unusual after a year+ like APPL has had.

the rumors

Over the past few days, perhaps only in response to the AAPL decline, I’ve seen three worries circulating about the company, namely:

–Phone companies in the US want to reduce iPhone subsidies.  (Who wouldn’t.  The carriers pay AAPL $600 or so for phones that they resell for $200.)  There’s talk that ATT and Verizon want to charge $230 instead.  It’s not clear that the carriers will be successful.  But if they are, higher prices might clip a couple of percentage points off the growth of AAPL’s most important business (half the company’s profits).  But if that means 22% growth instead of 25%, that’s not such a big deal.

–Mac sales may be slowing.  One analyst is reportedly suggesting that AAPL computer sales may have been down year on year in the March quarter.  That wouldn’t be good, either.  But, realistically, Macs are too small to matter that much to AAPL’s business.  And although tere are good industry data for slow-growth markets like the US and the EU, I don’t think there’s any good way to gauge Asian sales.

–iPad sales may be slowing.  This would be a more serious issue, since tablets are 20% of AAPL’s sales–and thought of as the company’s next hot product after smartphones.  I’m not sure what evidence there is, however.

my take

I’m reading the downward AAPL price move over the past week or so as a natural reaction by market participants with short time horizons–taking profits in a stock that has performed so well in both relative an absolute terms.  The really noteworthy thing is that the reaction took this long.

It’s possible that the worries I’ve seen surface in the past couple of days are justified, but my initial reaction is that the declines prompted the rumors–not the other way around. We’ll know for sure when AAPL reports earnings in a couple of weeks.

What impresses me most about AAPL is its valuation.  On consensus estimates, the stock is trading at under 14x fiscal 2012 earnings and yielding around 2.5%.  If those are anywhere near correct, there’s nothing “wrong” with AAPL other than that no stock goes up each and every day.

Current weakness may well be the trigger for AAPL holders to give their position sizes a sanity check.  That alone may prompt further selling as long-time holders give more thought to exactly how much AAPL they hold.

 

frozen by the screen: a portfolio manager’s ailment

frozen by the screen

Every seasoned professional investor I’ve sat down and compared notes about the profession with has experienced this phenomenon.  Usually it happens when the market is declining and you’re underperforming–sometimes badly.  You turn on your computer or your trading machine to see what prices are doing.  Your stocks are doing poorly again.  But instead of either turning to another page or going back to work, you sit and watch the flow of trading in your stocks and worry.  You may be mesmerized or horrified.  You’re using up a lot of emotional energy.  You know this isn’t helpful, but you just sit and watch–and maybe perspire heavily.  You can’t tear your eyes away from the screen.

This isn’t good.  For one thing, you’re not doing anything productive.  You’re not thinking about how you can tweak your holdings to achieve even higher levels of outperformance.  In a deeper sense, though, this behavior is a sign that you’re either about to lose your confidence or have lost it already.  You’re focusing on failure, not success.

for professionals

This happens to every professional now and again.  It’s the equivalent of a hitter going up to the plate worrying about being hit by a hundred mile an hour fastball and breaking his ribs, rather than visualizing how he’s going to hit a double off an accomplished pitcher.  You’re setting yourself up for failure.And the cold reality is that if you can’t get into a positive frame of mind, then you may not be cut out for this line of work.

For a portfolio manager, there are several obvious steps to take to restore a positive mood:

1.  Turn off the price screen and don’t turn it back on.

2.  Take out your analysis of the stocks you hold that are performing the worst, rethink and rework your assumptions, and come to some conclusion.  The result will probably be that you believe the stock is as cheap as you thought.  Even if you spot some fatal flaw, you’ll have some reason other than fear for making a change.

3.  Rethink your portfolio structure and whether it’s still appropriate.

4.  Look for depressed stocks that you always wanted to own but thought they were too expensive.  Consider whether a market downdraft has made them more attractive.

5.  Look for long-term weak performers in your present portfolio (you know they must be there, because everyone has them).   They’re probably not going down much (because they never went up).  Think about using them as a source of funds for any new additions.

6.  You can always take some risk out of the portfolio by making it look more like the index.  In my case, however, every time I’d done this it’s been a mistake.

7.  If you’re going to do something stupid, like selling a perfectly good stock while its price is down, do it in a very small amount.

8.  If nothing else works, go to the gym  …or read a book.  Just don’t turn the screen back on.

Of course, there’s an underlying assumption I’m making–that what’s going on is a moment of mental weakness, a temporary loss of focus.  It’s also at least possible that your unconscious is telling you that you have deep fundamental flaws in your portfolio that you need to fix as fast as possible.  But if you know yourself well enough psychologically, you should be able to tell the difference.

for regular people investing their own money

Funnily enough, these are much harder cases to diagnose.  Good professional investors are highly trained in what is an often counter-intuitive way of thinking about the world.  So the pitfalls they encounter are usually well understood, because they’re the ones every other manager has encountered as he tries to master his craft.

For regular investors experiencing angst at declines in their holdings, I’d have three basic questions:

1.  Do you know how the companies whose stocks you hold earn their money?  Have you read quarterly/annual reports and 10Q/10K filings?  Have you formed an expectation about potential returns for each holding?  If you haven’t, you’re not investing, you’re buying lottery tickets.

2. Do you have an overall financial planning strategy?  Is the risk in the stocks you hold appropriate for your economic circumstances?

3.  Are you willing to devote the time needed to develop investing skills, or would you be better off finding a financial planner to help?  (Finding a competent adviser is a whole other can of worms, however.)

why am I writing this today?

My personal stock portfolio had been holding up relatively well during the correction–until yesterday.  I did end the day with two green lights on the screen, DKS (who knows why) and 1128:hk, where the market was closed while New York was falling sharply.  But my other stocks really got clunked.  That’s just life.   But I noticed that I was starting to stare at my screen in an unhealthy fashion.  So I ran for about a half-hour and read a couple of chapters in a book about web design. 

For what it’s worth, my take on the sharp reversal in my portfolio’s relative fortune signals that the correction has entered a new phase.  The tendency in downdrafts in the market is for investors to begin by selling stocks they don’t care much about.  As the correction progresses, the selling reaches closer and closer to what people consider their crown jewels.  If the decline ends in a mini-panic, even parts of core holdings get shown to the door.  I’m not saying this last happened yesterday, but I do think the correction took another step closer to completion.

I’ve updated Current Market Tactics–Are we in a correction?

I’ve just updated Current Market Tactics.  If you’re on the blog, you can also click the tab at the top of the page.

bear market rallies

bear market rallies

Bear market rallies are counter-trend movements in downtrending markets.

In one sense, they’re analogous to corrections, only occurring in bear markets rather than in uptrending ones (which is why I’m writing about them the day after my post about corrections).

There are several big differences, though.

Corrections tend to be relatively short in their duration and in the extent of their decline.  They also tend to occur frequently and irregularly in any bull market.  Their major cause, as I see it, is overenthusiastic valuation of stocks in an environment where the underlying economic fundamentals are relatively well understood.

Bear market rallies are none of these.  Here’s how/why:

Bear markets themselves are often described as playing out in three phases, in the following order:

hope, where investors are either in denial or radically misunderstand the deteriorating economic fundamentals,

boredom, where investors understand that economies are in recession, (correctly) believe that an upturn is not likely for a considerable period of time and become reconciled to relatively poor times, and

despair, when investors, after waiting in vain for signs that economies are turning up,  give up all hope of ever seeing any improvement.  Their negative emotional state sometimes causes them to sell their stocks across the board and at foolishly low prices.  This sort of final selloff, if one happens, typically marks both the bottom of the market, the lowest point of recession and the beginning of recovery.

Significant bear market rallies typically happen only twice in a bear market.  They mark the transitions between phase one and two, as well as between phase two and three.  They can easily produce a 10% rise in the index and can last for a month or more.  Unlike bull market corrections, bear market rallies are based on a mistaken reading of the economic fundamentals.  They fail as investors work out that the view they have of the economy is too rosy.  In so doing, they usher in the next down phase.

Market tops are notoriously difficult to detect.  So many investors incorrectly regard the first leg down in a bear market as just a big correction, which they diagnose as providing a super-good buying opportunity.  That belief is what starts the first bear market rally.

As the “boredom” phase of the bear market  stretches out, investors try to anticipate the beginning of the next bull phase.  They know that bull markets typically start when sentiment is at its lowest ebb and that the first movement upward tends to be explosive.  So they begin to argue (incorrectly, for a second time) that downside is limited and upside is significant.  They also think they can see early signs of economic recovery.  These sentiments are the tinder that sparks the second bear market rally.  It, too, fails as new economic developments throw cold water on these beliefs.