THE Investment Question of the Decade - When to buy back in...or perhaps when to get out already?
Commentary is a little technical and makes assumptions. If you have questions, we’re happy to answer them in more detail. On a lighter note, please check out “The Best Songs EVER – Seriously” playlist on Spotify. Whether a connoisseur of music across the board (6 days’ worth) or now just plain bored, you’ll like it!
Hope you and yours are coping well. We're up +18% net YTD but are not resting on our laurels. When do we get back in the stock market? Problem: we are quants now. Objective models will not likely work as well near-term in our economic chaos, despite pending (?) massive government bailouts. So, we're still thinking about this one. That said, we do have an idea: capitulation matters. We don’t have it - just an “orderly” waterfall:
Re SUBJECTIVE technical analysis, our opinion is DJIA 18000 as about the point from which a dead cat bounce begins, probably this week. The market now WANTS to rally, despite the chance of a bear market trap. Any bounce will likely be relatively strong lasting a few weeks but ultimately not sustainable. We will then resume our descent back to test/break current lows, depending on the nature of the market’s realization of our evolving volatile, deep, W-recession reality.
Our opinion is also based on one more thing: Price/Book Value, if it is even possible to ascertain valuation in our national bankruptcy-like circumstances. Assuming America does not disappear permanently and that most stocks avoid actual bankruptcy (a fairly decent bet), some asset-based valuation should still hold. The only widely used (asset-based) valuation measure remaining is the imperfect Price/Book Value metric (chart below is median Price / BV for the top 150 liquid US stocks):
By this measure, stocks still do NOT look good unadjusted (i.e. as-is based on pre-coronavirus book value) or adjusted (i.e. de-value book value by a subjective % based on pending massive earnings hit estimate and market re-evaluation of corporate assets’ value). Unadjusted Price/BV implies a -25% price drop from current level to reach 10-year low levels. Adjusted data imply that Price/BV still remains high at a time of massive uncertainty (i.e. -40% price drop from current level).
BOTTOM LINE: the roller-coaster ride is not over. Stocks will likely soon rebound back or perhaps present a wonderful opportunity to get out with lower loss. The ultimate market bottom though is more likely DJIA 12000 - 15000 (average -55% from peak) or 8000 - 10000 (average -70% from peak) in truly horrid scenario. Keep your seat belt fastened: i.e. still buy as objectively as possible re strategy but USE STOP LOSSES. To all then, good luck. We’re all gonna need it. Onward and upward!