Another super strong week for equities

Author: Value Investor  Date: 2020/04/17

Another super volatile and super strong week for equities is over. Well, maybe not as volatile and strong as the previous one, but there is nothing to be shy about. That is if you are long equities, of course. And by the end of this week, it appears that there are no bears left. They have been repeatedly crushed by wild upside market swings. I am sure that there are lot of very sorry folks out there who are not at all happy with this roaring up market. And they are not just deplorable “speculators” who at the time of crisis are often blamed for almost everything. I bet, most of these sorry folks are your respectable mutual fund and other portfolio managers, who repeatedly put downside hedges on their portfolios and repeatedly got burned, quite severely. True, they have not suffered any losses, but they did not participate in any of the spectacular once-in-a-decade upside either.

It would not be correct to blame them for anything, though. They’ve just acted following the best theories of portfolio management and their own cautionary instincts that served them so well over the years. It’s just the market did not behave as it should. Well, that’s the nature of beast: the market always moves in unpredictable ways - at least short-term. Actually, it tends to move against the prevailing “market wisdom”. And what was the prevailing recent idea shared by the vast majority of fund managers? You are right: the market should retest the lows. But it did not. At least not yet.

By the way, what is the prevailing wisdom now? You are right again: the economy is just about to be reopened and gradually we’ll all be back almost to our usual happy “normal”. Ha, but now, that we know the prevailing wisdom, and knowing how the market likes to move against it, what should we do? Short the market? Well, I would not recommend this, unless you are in a privileged position of knowing something that nobody knows or you see actual money flows of large investment funds (i.e. what they do with their money: what they buy and what they sell).

Shorting the market could be (and it usually is) suicidal. As one wise hedge manager said, there are two main dangers for a man: drinking and leverage. Do not ever take a leveraged position unless you have an inside market information (well, if you do, make sure you comply with the SEC regulations in such a case, or consequences could be dire).

But, all these (rather trivial for most of you, I am sure) thoughts aside, what should we do? The market is the biggest casino in the world and if you still have some money left in your pocket, I am sure it just burns a hole in it. Well, my advice, as yesterday, just keep your money for now, as downside risks far exceed a potential upside. S&P500 closed at 2,874.56 today. I bet it will close lower at the end of the next week, maybe, sharply lower.