I remind you of this point as investors are chasing markets due to Fed liquidity, but as we saw in early March, the Fed’s “invisible hand” is not infallible.
The risk/reward ranges remain unchanged for the week as the market didn’t change much.
“Friday’s close brings the 61.8% retracement level AND the 200-dma into focus as the next resistance levels. The upside in the market remains limited to 4.5% to 7% currently. (This is certainly nothing to sneeze at, considering such would be regarded as a decent year’s worth of returns. That just shows how skewed things are currently.)
The downside risk ranges are a bit more disappointing.
- -4.7% to the previous 50% retracement level: risk/reward equally balanced.
- -12.5% to the previous higher low: risk/reward is mildly out of favor.
- -20.5% to the March 23rd low: risk/reward extremely out of favor.
From an optimistic view, a reopening of the economy, a virus vaccine, and an immediate return to low single-digit unemployment rates would greatly expand the bullish ranges for the market.
However, even a cursory review of the data suggests a more “realistic” view. The economic damage is going to be with us for a while. Until earnings estimates are revised substantially lower to reflect the ‘actual economy,’ I have to presume the relevant risks outweigh the current reward.”
We continue to remain long our reduced equity exposure and have been buying undervalued opportunities over the last few weeks. However, we are also balancing that equity exposure with offsetting hedges and a larger than average level of cash. We also have been increasing our duration in our bond portfolios as well as interest rates will continue to head toward ZERO this summer.
Just remember, when the market does bottom, there will be no one wanting to “buy.”
We aren’t there yet.
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