Simple stuff gets confusing sometimes. For instance, according to the national league of cities, the most common street name in the U.S. is Second Street. First is the third most common street name, Third is the second most common, while Fifth is the sixth most common. "Who's on first?"
The stock market is confusing a lot of people right now. It seems simple: news is bad, there's a pandemic for the first time in generations, people are dying, and the economy has taken a beating for the ages. Stocks should go down, right? But they're not. They've recovered so much of their March slide that they've produced the shortest bear market in history. The Dow Jones Industrial Average was in a bear market for just three days.
"But how can that be?!" "It just doesn’t make sense!" "It's a head fake before we drop another 50%!" These are just some of the comments I've heard. But the fact remains that stocks have surged mightily from March 23 lows. The shortest bear market in history was coupled with a monster rally in the alley. You know what that means? It means sad bears.
I kid of course. The main U.S. stock indexes gained an average of 33% from the depths of despair and uncertainty on March 23:
Let's look at that another way – here are the sector index performances since March lows sorted highest to lowest:
Energy rose almost 60%. Materials and discretionary stocks are the next best performers. I have talked a lot about health care and technology stocks leading the buying out of the depths, but the biggest bounce came from one of the weakest groups: energy.
The way I rank sectors for technical and fundamental strength shows energy still way down at the bottom:
Looking at how the market has bounced from the lows may make you feel like you're on the intersection of the sixth and the second most common street name … just near the intersection of First and Third. Only, neither Fifth and Third nor Second and First intersect.
As I've explained in the past, I gave up on the futility of trying to constantly justify and explain the market. Things happen in life all the time, and often they defy explanation. Even more often, we just have to deal with them and adapt. Can you think of a better example than a global coronavirus pandemic cropping up from nowhere and forcing hundreds of millions to stay locked in their own homes for months?
What's more important: trying to figure out why or figuring out how to best adapt to the new environment? That is what investing is all about. Much time and energy is unnecessarily wasted trying to fit events into nice little shiny boxes. Here's the reality: sometimes they fit, and sometimes they don't.
In my opinion, having fluidity and flexibility will yield not only better results, but a more peaceful and harmonious existence. Don't fight the tide, and don't fight the tape. Just flow.
When the Big Money Index (BMI) went oversold, I knew it was time to buy stocks. Extremes don't last forever, especially when oversold. Things look a little different on the other side. Now the BMI is heavily overbought. The main difference is – it can stay that way for a while. I wrote last week that the longest overbought period in the past 30 years was over three months (65 trading days).
This time, we have been overbought for 13 trading days. It could last epically longer, or it could end tomorrow. The 30-year average says to expect the overbought period to end after 20 trading days – or another week and a half.
But no one knows. What is paramount is to have a plan. When oversold, it's best not to sell. It's best to have cash and buy when others freak out. Naturally, the process of raising cash is dynamic, with markets dictating when to begin and how to deploy. When overbought, it's best to sit on your longs and let the boats rise with the tide. Overbought markets are not ones to add a ton of stocks, however. But if you must, look for outliers: the ones with the best fundamentals and strong technical support. They tend to be the most resilient after inevitable market pullbacks.
The market is in a bit of a confusing spot right now. News and fundamentals say "no." Technicals and price performance says "yes." Leadership is both logical and confusing. We are overbought, which would incline one to sell, but it could last a while longer. The market is giving us a bonus round with which we could potentially rack up huge gains while we wait for a turn. Or it could turn tomorrow.
The key is: it doesn't have to make sense. One just needs to be able to adapt as the environment changes. Standing on a corner explaining to everyone why it should be sunny doesn't shield you from the rain – no matter the logic or fact you put forth. If it rains, you'll get wet.
The bears were able to pound the bear market drum for like three days. They will get it right again, but the data says: not now. The data says that the buyers are in control and might keep it for a while. The market is due for a pullback, but I won't know when until the data shifts and says selling has begun to increase.
Now we must simply adapt. Lockdown forced us home. Reopening is here whether we agree or not. A lot of energy and time will be spent debating it. But it's here regardless. It feels good to have explanations for anything. But we all know it's impossible to explain everything.
That's not to say there is no reason. The reason always comes – just not always when we want it to. "When it is all finished, you will discover it was never random." – Unknown.
The Bottom Line
We (Mapsignals) are bullish on high-quality U.S. equities in the long term, and we see market pullbacks as areas to pick up great companies.
Disclosure: The author holds no positions in any mentioned securities at the time of publication.