Last week was quite a crazy one for markets, the Dow experiencing its worst week since 2008, when the global financial system went into meltdown.
Read more: https://www.cnbc.com/2020/03/19/stock-market-futures-open-to-close-news.html
If we go back to the start of this market correction, I was initially looking for a 20% correction, just touching that ‘bear market’ line in the sand and hitting the area of the 2019 lows. How this novel Coranavirus outbreak would develop was not clear but it was seen as more a China issue that they would deal with and depending on how long it took it could have some effect of global GDP.
As the situation developed and we went through that 20% correction, I took heed of the warning coming from Mohamed El-Erian of up to a 30% correction and revised my investing plan to allow for this extended move.
Through most of this correction I focused on 3 areas that I wanted to build exposure, including the 4th in my plan just as we got close to the 30% market correction level. The first 3 areas were Gold equities [GDX], Semiconductors [SOXX] and Dividend Growth [DGRO]. And the final area for which I was wanting better value as Chinese markets had been holding up well since they appeared to be coming through the outbreak was Emerging Markets [VWO].
You might notice from the tickers mentioned that these are all ETF’s. I did this to help remove some single stock pick risk from the portfolio as this rapid correction has really shown how some individual stocks can get decimated. I’ve written about the reason for investing in these areas on many occasions and while the drawdown is not wanted, the movement in the markets has allowed the intended scaling-in plan to execute as intended.
Getting to the 30% correction level on the SP500 happened rapidly after the 20% level was breached because the situation in Italy become dire and this concern and increasing cases in other parts of Europe and the US quickly lead to an escalation in measures being taken, to the point now where many businesses are closed and an increasing percentage of the worlds population are under some kind of quarantine/curfew/isolation directive.
Here is the $SPX500 chart for w/e 20, March 2020. Price is below the 30% correction line.
I don’t want to see these markets go any lower but after seeing New York and California start to lock down their states, bars/clubs/restaurants closing across the world and reading increasingly sad statistics coming out of Europe I think that markets, despite pricing in a lot of bad news already, won’t be able to resist reacting to some of the data and human stories we are going to see over the next week.
I thought that the markets last Wednesday were getting to this point of peak fear, and I’ve said as much, but I’ve had to revise this. Even though we’re seeing immense levels of stimulus/support packages announced, we’ve also seen some events that show market internals are not functioning all that well.
There have been a couple of days now where real panic has created the Triple Whammy of Equities, Commodities and Bonds all selling off at the same time. There are issues in corporate credit and there is deleveraging going on that is causing indiscriminate selling and I think scaring investors out of their positions. It’s quite a mess, and the speed of this correction is a big factor in this. Just look at those weekly bars on the chart, they are strong, there are gaps and there has been no relief rally weeks to allow consolidation.
I’m getting a bit off track here, but I like getting some of my thoughts down like this to help clear my thinking and keep a record to review.
What I’m getting interested in, if we do see another step lower, is the level around 2,140. I find this area quite interesting. There’s the technical angle is that it would be giving back half the gains since the market bottomed during the great financial crash and it also hits a level that markets were at on the day President Trump won the election. I just find that quite poetic in that respect, combined with the symmetry of the 50% fib retracement.
From Friday’s closing level on the futures, that requires another 6.8% fall which does not sounds good anyway you want to try and put it, the best I can do is that it’s only another 4.6% off the high! And considering that the SP500 lost close to 13% last week and over 11% the prior week, it really doesn’t seem like asking much for it to fall 6.8%. This is certainly not what I wanted to find myself saying during the third week into March this year!
But each time the markets fall another percent, relative measures of value are improving and become more attractive. It’s more difficult to say that PE ratios are falling as the ‘E’ side of that ratio is a big unknown at the moment and one of the reasons there is such lack of consensus regarding where these markets are going.
This is not to say that markets won’t go for the 40% correction level which brings into focus the huge psychological support of the round number at 2,000. It was Goldman Sachs US chief equity strategist David Kostin who forecast the SP500 dropping to 2,400 as their base case scenario but suggesting a trough level at 2,000 if the economic consequences from COVID-19 continued. I think at this stage it’s clear that they have continued.
So somewhere between my target area of 2,140 and Goldman’s bear level of 2,000 is where I think market support will surface and with a longer term view, I don’t think we should ignore these levels as an opportunity to increase exposure to some high quality companies. With prices getting down to around these levels a pertinent question become can they really fall more than they can go up for here?
With this is mind, I have a few target stocks that I’ve been looking at recently, companies I think can bounce fast and strong when something finally turns this bear market around and marks that the worst of the virus outbreak is behind us.
| Stock | $ Price | % From High | Target Price | % To 52wk High |
| Apple | 229.07 | 30.06% | 200 | 63.75% |
| Microsoft | 137.42 | 27.83% | 125 | 52.32% |
| 149.73 | 33.15% | 135 | ||
| 23.87 | 47.88% | 20 | 129.00% | |
| Tesla | 427.45 | 55.83% | 355 | 172.58% |
| Micron | 36.18 | 40.80% | 30 | 103.73% |
| Square | 37.92 | 56.49% | 35 | 149.00% |
| Roku | 76.23 | 56.75% | 65 | |
| Wynn Resorts | 51.92 | 66.06% | 35 | |
| Toll Brothers | 15.86 | 67.80% | 13 |
This list is subject to change and does not include some stocks I already have like Google and Amazon which would be on this list otherwise. Some were also past favourites but profits were taken, such as Apple, Square and Micron. Prices are now well below where profits were taken and I’m happy to consider getting them back in the portfolio.
Depending on how the markets are behaving I could also mostly abandon these single stocks picks and just commit further to the ETF route I have taken recently. Balancing risk and opportunity has become something to be nervous about recently and I think maybe just going with a few favourites and the ETF’s could be more prudent.
Additionally, stocks like Wynn Resorts need to be treated very carefully. I think most casinos are now closed for 30 days but if these get extended these kinds are businesses are going to become distressed as they burn cash with no customers. There are safer opportunities and I could avoid ones like this unless I see concrete positive news.
Even though I’ve listed the % upside available to the 52-week highs, it does not mean I want to hold all these for that kind of move. There’s growing uncertainty about what kind of damage is being done to the global economy, so while I have high confidence this stocks could gain rapidly, I’m less confident in a full recover and the potential for even higher levels.
The weekend news of more regions of the world implementing lock-downs is surely going to put markets on the back foot as the new week gets started and the likelihood of this extended correction is looking more certain. This could put the leveraged players into a final round of pressure that will cause some capitulation and it’s for that kind of day that I a clear plan of where to invest an extra capital I decide to layer into the markets.
