Saturday, June 06, 2020

Too Good to Be Sustainable

After an amazing recovery from the March 23, 2020 bottom, the S&P is within 1.7% break even for YTD.   As the media has noted, the S&P has the best ever 50 day rally from the bottom.  Interestingly, after seven other strong 50 day rallies, the market was up 100% of the time 6 and 12 months later, averaging 10.2% and 17.3% respectively.  According to the chart in the article, 6 of the 7 coincided with the end of a bear market.

Yet the data doesn't give me confidence that the rally is sustainable.  There are too many headwinds: small business failing due to lockdown, protest and riot curfews closing down businesses, and the possibility of a significant increase in COVID-19 cases as states reopen.   The downside risk is much higher than the upside potential, in my opinion, despite the data on previous strong 50 day rallies.

Separately, I already thought that many stocks were overbought and very expensive before COVID-19.   I read somewhere that about 10-20  stocks are responsible for 1/3 of the S&P recovery.   Some stocks are even hitting new highs, even though considered expensive by fundamentals before COVID-19.

Nah, not sustainable, despite the data on 7 similar previous rallies.

I  will keep selling into the rally and look for an opportunity to buy back at lower prices.

For more on Reflections and Musings, check back Saturdays for a new segment.

This is not financial nor investment advice. Please consult a professional advisor.

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