Coronavirus Environment Update

Part IV

Hello again,

Welcome to the fourth installment to the coronavirus environment update. When working for a bank during a financial crisis, you are sometimes called upon to work outside your typical day to day. This is no different. Unfortunately, due to this pandemic, a lot of us who are involved with OCC and Fed reporting need to be available for any ad hoc requests that may come our way. This is no different.

Anyways, with my apology out of the way, we are going to take a look at the market in order to try to understand where things might be headed. If you remember before here, here, here and here, we attempted to time this bounce perfectly. So far, we have. If you would have bought when the daily MACD made a positive cross, you will be somewhere in the realm of +10%.

I personally filled my portfolio with my favorite tech stocks, those being Apple, Amazon, Microsoft and Google. I took a small hedge, roughly 8% of total portfolio and bought $TMF, the triple leveraged treasuries ETN. The reason I did this, was that with an 8% allocation in a 3x ETF, we are basically adding a 24% $TLT hedge while allocating less portfolio value than a basic $TLT position.

So, this aggressive allocation comes out to the following: Apple, Amazon, Microsoft, Google, 23% each, and what could be considered $TMF, another 24%. For what my personal risk appetite is, this is appropriate. I am justifying a typically inappropriate allocation in far too few stocks by keeping it limited to only Mega Cap Low Beta equities. The overall beta for the portfolio is around .7. This market is going to continue to whipsaw, with the VIX around 40, you can expect to see some -2 to -3% days on the horizon, as well as +2 to +3% days. Yesterday in particular is a perfect example.

Here are the charts, and what we can tell from looking at them:

The daily Nasdaq chart is showing a strong positive bias. We entered right as the MACD fast line crossed the slow line, which set us up for our 12.5% overall gain. Looking at the Weekly chart, we can see that it might be possible for another MACD cross on the longer time frame. What this means, is that we might be in an extended upward swing for a much longer period of time:

Barring any extreme news events, or anything along the lines of a resurgence of Covid in other parts of the world, leading to an extended lockdown, I would say that if you have not bought in, the weekly charts are telling you to get ready to buy.

Look, things are pretty crazy right now, you can call them unprecedented, but we have seen things like this before. It is going to take a long time for emotions to calm down. It is going to take a long time for people to be comfortable getting back out there in the “wild” and sit down next to strangers in your favorite taco bell. There is going to be a new normal established, and there are going to be a lot of small businesses that suffer for it. It is just a reality of the coronavirus environment.

Eventually, people will get back to work. I read a statistic that roughly just 29% of the work force has the ability to work from home. That is not a very compelling number to read. We most likely will feel this one for a long time coming. It will most likely take about two years for some of these small businesses, like restaurants and other congregational types of stores to reopen.

The good news here is that it is not hitting as hard as the great recession. There is a financial concern, and credit markets are not as stable as they were two months ago. But the world is more financially prepared for a crisis than we were 12 years ago. I can tell you this from a banker’s perspective.

Knuckle down and focus, and you will be able to ride out this coronavirus environment.

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