Is it time to buy stocks? Or is this a sucker’s rally before the drop?

18

Well, another week that felt like a year.

Lots of details to unpack, so let’s just jump straight into it.

The 3 big things that happened this week

3 big things happened the past week. And all 3 coincides with my buy signals, so I’ll discuss each individually (framework for the 3 buy signals set out here).

Unfortunately so many things happened the past week that I can’t cover everything, so I’ll just touch on the big ones.

As always, this article is written as at 27 March, and will not be updated going forward. Updated thoughts are on Patron.

Reminder: We just launched the REITs Investing Masterclass. This teaches you everything you need to take your investing to the next level – from reading macro signals, how much REITs to own in your portfolio, what is the best kind of real estate, what kind of REITs to avoid, what growth drivers your REIT must have, and more. If you even plan on touching REITs in 2020, do check out this course.

Buy Signal 3 – Financial Plumbing

Let’s start with Buy Signal 3, because by far the biggest moves this week came from the Feds.

2 things the Feds did, both absolutely massive:

1) Committed to unlimited QE

On Monday, the Feds basically came out and said they would buy unlimited amounts of US Treasuries, until the Treasury problem went away.

As discussed last week, the US Treasuries market is the deepest and most liquid market in the entire world, and over the past few weeks we’ve been seeing it start to freeze up with record bid-ask spreads. This was creating big liquidity issues for everyone from hedge funds to corporates.

Once the Feds committed to buying unlimited Treasuries, the problem went away. TLT (the world’s largest treasury ETF) rallied 6% on the day, and over the rest of the week, we started to see US Treasuries unfreeze. Bid ask spreads came down, and this problem was solved, for now at least.

2) Started buying Corporate Bond ETFs

What the Feds also did on Monday, was to announce the buying of Corporate Bond ETFs.

Now why is this so big? A bit of background is required.

The Feds can buy US Treasuries (US government debt) or lend money to banks, but they are legally prohibited from lending directly to companies.

And over the past few weeks, corporate credit has started to freeze up. Investors, fearing a big corporate bond downgrade (discussed previously), have started to dump corporate bonds – in bulk. This led to a fire sale of corporate bonds, in a market where there was no buyer.

This caused the price of Investment Grade bonds (IG Bonds) to plunge. And everyone left holding the IG Bonds were sitting on horrific mark to market losses. It was also creating soaring refinancing costs for investment grade borrowers.

This threatened to seize up the entire financial system.

What the Feds did this week, was that they basically said they would buy Corporate Bond ETFs, and this money would be used to buy corporate bonds.

This was massive because even in 2008 the Feds never bought corporate credit.

This move basically sets a floor on the price of corporate bonds (because the Feds now buy everything), and sparked a massive rally in corporate bonds. Circled in red below.

Long story short – the short term problems in corporate bonds have abated. Mark to market losses go away, and investors can now exit corporate bond positions in an orderly manner.

But astute readers will point out that the Federal Reserve buying corporate bonds only affects pricing. It does NOTHING to affect underlying default risk.

In other words – the price of a corporate bond may rally to 90 cents on the dollar, but the underlying default risk, the chance that the company can’t repay the bond, that’s tied to underlying cash flow from the company. And that hasn’t changed one bit.

But remember that the Feds cannot lend to companies directly, only governments or banks can. So the Feds hands are tied here. They basically did what they could, and said “Guys, the rest is up to you”.

USD

A quick update on the USD.

It seems like the USD swaps that the Feds provided last week, have started to kick in. USD buying pressure has abated, leading to the plunge in the DXY (dollar weighted index) circled in red below.

This fall in the USD led to a massive rally across all risk assets, which we saw the past week.

I still think that after this fall, the USD may come roaring back though. A lot of the underlying issues around corporates not having enough USD still hold true, and much of the USD swap lines are stuck at central bank / primary dealer level.So I’ll monitor this closely going forward. 

It may not look like much, but that dip in the High Yield spread actually means a lot.

Rounding it up – Buy Signal Triggered

So to round it up – What the Feds did on Monday, coupled with whatever they did over the past 2 weeks, has solved the short term liquidity / financial plumbing issues.

The problems that remain, are refinancing risk, default risk, credit risk etc. The plain vanilla economic stuff.

That will be Phase 2 of this crisis. But for now, I’ve taken Buy Signal 3 to be triggered. More precisely, it was triggered on Monday after the announcement from the Feds of unlimited QE and buying of corporate bonds.

Buy Signal 2 – Fiscal Policy

So on Thursday we had this absolutely monster of an unemployment claims.

Wow.

We can’t even find the 2008 Financial Crisis from this chart.

Anyway, over the past week we saw a massive $2 trillion fiscal package from the US government.

I think the fiscal package was skewed towards the big companies (at the expense of the smaller ones), but I get that the intricacies of policy making always results in winners and losers. So I’m not going to judge.

All in all, I think it was a pretty good stimulus package, and will definitely help the economy.

It’s definitely not enough though, so we’ll see more in the coming months.

But it’s a great start, so I’ve taken Buy Signal 2 to be in progress.

Buy Signal 1 – Virus

Over the past week, the world has ramped up anti-COVID-19 measures at a rapid pace.

We saw India shut down, we saw most countries close their borders to foreigners, and even in Singapore we saw a drastic stepping up of social distancing measures. Even China has banned all foreigners from entering.

And the final nail in the coffin? The Olympics got postponed for a year too. The Japanese, who were holding out until now, finally gave in.

So I’ve taken Buy Signal 1 to be triggered. I think we are now at the stage where the world has started to take COVID-19 seriously, and has started implementing a real lockdown.

And once drastic measures are taken, it is only a matter of time before COVID-19 comes under control.

The lesson from China is that once a country goes into full lockdown, it takes 2 weeks for cases to taper, and about 1.5 months before a phased reopen is possible. Unfortunately the West only implemented a partial lockdown, so we probably need to buffer in more time there.

My base case prediction here is probably for phased reopens in the West in May, possibly spilling over to June.

Update (29 March): Received some great feedback on why Buy Signal 1 may not have been triggered just yet. A bit of  context. With Buy Signal 1, most investors are watching for the peak, and it’s impossible to time the peak perfectly, so we need to frontrun the signal slightly. The way we did it was to watch for drastic shutdown measures being taken by the world (because this marked the peak in China).

That said, having considered the factors, I do agree that Buy Signal 1 may not be fully triggered, but may be triggered only in the coming few days. Accordingly, I will be more cautious about averaging into this market – spread out my buying in curve.

Thank you for everyone who raised the great comments. This is what the FH community is for! 

This exchange has also made me realise the importance of coming up with a new set of “buy signals” so we know what to watch out for in the rest of 2020. Prelim thinking is: (1) Virus situation, (2) Fiscal and Monetary Stimulus, (3) Monetary in and outflow. Will beef up the framework in next week’s article.

That said – one thing that really worries me is that based on past influenza outbreaks, stuff like Spanish Flu and Hong Kong flu etc, there’s always a SECOND peak. So the flu goes away, and a few months later it comes back, with a vengeance.

The chart for the Spanish flu is set out above, and unfortunately, no one knows why this happens. There are many theories (eg. People getting complacent, schools reopening etc), but truth is, no one has the answer.

And without knowing why this happens, we won’t be able to say with certainty that it won’t happen in 2020.

I see this as a low probability event but one that if it materializes, has a massive impact to financial markets. Accordingly, it’s an event that I cannot not prepare for.

2 out of 3 buy signals triggered

In any case, 2 out of 3 of my buy signals have triggered, and the remaining is in progress.

So starting on Monday, I’ve started to average into this market.

I’m buying in using cash only (no leverage), I’m taking all positions as locked in for 3 to 5 years, and I plan to continue buying in for the rest of 2020 as the fallout from COVID19 continues to play out.

Most of the positions are blue chip stocks that I’ve been monitoring for a while now, especially those that have hit my internal price targets. You can take a look at Patron for an idea of what I’m looking at.

Phase II of the Crisis – Economic

The 3 buy signals have treated me well, but now that 2 of them have been triggered, I don’t think they’re of much use going forward.

I think that with the triggering of the 2 buy signals, we’ve now ended Phase I of this COVID-19 panic. Phase I was a sell-off triggered by disorderly deleveraging, and a panic rush to cash. That’s all over now.

Phase II of this panic, is going to be characterized by corporate defaults and layoffs, and plunging corporate earnings. Phase II is going to be economic in nature, and should be played just like any other big recession.

“We’re in the Endgame now”

I think that over the past week, European and American central banks and governments have crossed the rubicon. They’ve crossed the line in the sand.

They’ve basically come out to say that we don’t care what it takes, we’re going to pump in so much money that COVID-19 won’t stand a chance.

And THAT – that was the moment when investors in markets collectively realized that we’ve now hit the monetary endgame.

We’ve talked about this endgame a couple of times on this site – but essentially, there are 3 big dynamics in play right now:

End of the Long Term Debt Cycle – The 1980s till now has been a singular bull run in bonds. Interest Rates in the US went from 12% in the 1980s to 0% today. And that has sparked the biggest wealth generation many of us have ever seen. Its led to an explosion in passive investing.

That dynamic now, is over. We’ll no longer see declining interest rates going forward.

That’s going to remove a big tailwind for passive indexing, it’s going to require a rethink of exposure to bonds, and it’s going to spark a paradigm shift in investing.

Rise of China – The Rise of China is a unique point that threatens to radically reshape the global world order.

Over the past 500 years, there have been many transitions of power (eg. British to American, Dutch, Spanish, Hapsburgs etc).

Most of them have been characterized by big changes to the global world order, and changes to how an investor must approach investing. I think this trend will continue to play out in the coming years.

Rising Inequality – I haven’t quite figured out how this one will play out yet. But essentially, the solution to 2008 was to print lots of money. This inflated financial assets, which benefits the rich more than the poor (because the rich owns stocks and real estate). This contributes to income inequality, and triggering social unrest.

The last time we saw this dynamic play out was in the 1930s, which ended with WWII. How this one ends? I haven’t figured it out yet, but it will have big consequences in coming years, especially if governments’ idea of solving COVID-19 is to print even more money.

These 3 dynamics have been playing out for a while, but no one knew what would be the catalyst that set it all off.

As it turns out, it would be a guy somewhere drinking bat soup that would trigger it all. You can’t make this stuff up!

Suckers Rally ahead?

Coming back down to Earth, what are the immediate implications for markets?

We’ve talked about the suckers rally last week. It’s basically the part circled above.

In every big bear market such as the 1930s and 2008, there always seems to be a sharp drop, following by a massive rally. The rally can get so big that it retraces 50% of all prior losses, and it can be so big that it tricks market participants into thinking the worst is over.

To put things in perspective, a 50% retrace of the S&P500 brings us to about 2700+, and as I’m writing this article the S&P500 is at 2600. It we get that 50% retrace (or close to it), I’ll look to make some tactical reallocations to my portfolio.

3 ways this rally plays out:

Scenario 1. Market recovers in a V shaped recovery from here on out, and never retests the lows

Scenario 2. Market recovers, then falls and retests the prior lows over a period of time, before recovering for good

Scenario 3. Market recovers, then falls and fails to hold the prior low, and the next move down is a big plunge lower

Really tough to say which it is. Market technicals will give us the answer in the coming days, but once the answer is clear, there’s no money to be made.

My current thinking is this. I think the only way Scenario 1 plays out requires governments to pump in so much money that it results in a debasement of fiat currencies. This will cause gold prices (maybe Bitcoin) to fly.

I think maybe right now there’s a 5% to 10% chance of Scenario 1 playing out. But as an investor, I need to cater to all possible eventualities.

If Scenario 1 plays out, my gold positions and my equity positions will benefit, but my bond and cash positions will get hit, so I need to rotate them out quickly if I see this playing out.

But my baseline position, is that we probably see either Scenario 2 or 3. I think the economic impact of a complete shutdown to most of the G7 simply cannot be understated. In the coming months, we’ll start to unpack the full spectrum of the economic consequences.

Do we see a Recession, or a Depression?

Now the answer to this question is important because it affects how I’m going to approach buying in 2020. If it’s a recession, then I spread my money out equally. If it’s a depression, then I backload the buying.

Too early to say unfortunately – too many balls are up in the air.

If I were to venture a guess, I would say we *probably* escape a depression. I think governments will do just enough to ensure we avoid a 1930s style depression.

But a recession? A done deal at this point.

Even the most optimistic analyst is predicting about -10% US Q2 GDP growth, and I’ve seen baseline numbers of -24% for Q2.

If all plays out well, Q1 and Q2 economic growth takes a big hit (with Q2 taking the brunt), and maybe everything starts to improve in Q3. That’s probably a tad too optimistic though – we probably only start to see a marked improvement in Q4.

Closing Thoughts: What should you do with your portfolio?

Now I get a lot of queries asking me what you guys should do with your portfolio.

And trust me, I genuinely want to help you guys.

But the fact is that everyone’s portfolio is unique, and buying decisions have to be made based on your own risk appetite and investment objectives, and level of knowledge.

What I do with my own portfolio – is based on my income level, my income stability, my savings level, and my asset allocation. What I do is highly unique to me.

You need to make the decision for yourself too. Think about the stability of your job. Think about how much savings you have in the bank. Think about how much money you will need over the next 12 months.

Let’s say for example I can tell you which REIT to buy right now.

You then need to figure out how to approach buying? Do you lump sum purchase, or do you split it into 3 parts? Do you buy based on macro signals, or do you just average in at fixed intervals?

And what happens if REIT prices drop another 20% from here? What would you do then? What if REIT prices rally 50%? When do you sell?

How does the REIT fit in with the rest of your net worth? Are you overexposed to certain industries?

Give a man a fish, and you feed him for a day. Teach a man to fish, and you feed him for a lifetime.

That’s been my mantra for this site ever since I started. It’s impossible for me to help everyone out there, which is why in my articles I always share my thought process, and I leave you guys to evaluate – and apply to your own portfolios. And for everyone who writes in, I always take the time to share my honest opinions.

But I want to give you guys the skills and knowledge to make your own investing decisions, for your own personal situation. And in line with this, I’ve just launched the REITs Investing Masterclass.

This teaches you everything you need to take your investing to the next level – from reading macro signals, how much REITs to own in your portfolio, what is the best kind of real estate, what kind of REITs to avoid, what growth drivers your REIT must have, how to approach buying REIT, when to sell REITs, and more.

If you even plan on touching REITs in 2020, you NEED to check out this course.

Note: Even if you don’t plan on buying, I’ve made 2 lessons absolutely free as a preview. Just sign up and view them at no cost.

This 2020 crisis could be a once a lifetime opportunity to accumulate real estate on the cheap – it could get even worse than 2008.

For those of you who have your warchest prepared, don’t miss this one.

Learn how to make investing decisions for yourself, and you’ll be a much better investor for it. Don’t depend on anyone else for your own financial security.

 

Reminder: We just launched the REITs Investing Masterclass. This teaches you everything you need to take your investing to the next level – from reading macro signals, how much REITs to own in your portfolio, what is the best kind of real estate, what kind of REITs to avoid, what growth drivers your REIT must have, and more. If you even plan on touching REITs in 2020, you NEED to check out this course.

Even if you don’t plan on buying, I’ve made 2 lessons absolutely free as a preview. Just sign up and view them at no cost.


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18 COMMENTS

  1. Hi FH,

    Interesting analysis. I have to say I disagree with it this time, especially with regards to Buy Signal 1.

    We are just starting to see the impact of the virus in the US. Given their lack of coordination and preparation, further spread is inevitable and it will take some time to play out. 3 weeks ago, US had 546 cases, today 100,000 cases. Part of the reason for this big jump is increased testing detecting cases that were already there. Nonetheless, this number will continue to grow inexorably for the next few weeks and likely months because there are states where governors refuse to take strong action and there are no borders between states. In the next 2-3 weeks we will see reports of the healthcare system being overwhelmed in parts of the US. There will not be enough ICU beds, people will be dying in corridors like we see in Italy. The lack of protective equipment for medical workers means many of them will contract the virus. These are not speculations but entirely predictable given natural history of disease and state of preparation.

    All this adds up to a situation where the doom and gloom atmosphere will be further pronounced and once the initial sugar rush of the monetary and fiscal stimuli is over, the US market will come under pressure again from increasing lockdowns. People will be frightened.

    This will inevitably affect other markets including Singapore. There may be a lag before the market catches up with the medical situation but the overall trend will still be down despite occasional rallies.

    • Hi CMC,

      Thank you – very interesting point you raised.

      Perhaps I am being overly aggressive here on Buy Signal 1, I concede that. In the coming weeks, Latam, Africa, and Indo, all threaten to have situations that get out of hand – and a high possibility that the lockdown could drag beyond my base case scenario of May.

      Guess this would be a reason to flatten out the buying curve.

  2. Hi FH,

    This is a tough market to navigate. The 3 Buy Signals you mention are very sensible, yet if one waited for all 3 to be hit before buying, then it wouldn’t be the moment of maximum fear and hence lowest prices. For example, the prices before the 3 day rally were a lot lower precisely because the fiscal bazooka hadn’t been rolled out. SIA 3.03% retail bonds were at 80 cents before the bailout was announced.

    However, if one bought in before the buy signals were hit, then one takes a huge amount of risk given it could get a lot worse. So it ultimately boils down one’s specific ability to manage risk, “guts” and valuation of a company. If one were 70% cash, one could put in 20% last Monday and still be fine if market plummets further. In this case, one could start buying companies that one thinks are good value regardless if they go down further since it is impossible to catch the bottom. Alternatively, if one is 5% cash but has an iron rice bowl like being a doctor or civil servant, one could also do the same. But if one is holding little cash and a non iron rice bowl position, then one needs to be more cautious.

    For me, I keep in view the Buy Signals 2 and 3 you mention but I feel that Buy Signal 1 is the most important because ultimately everything is about confidence. All government measures are doing is wrapping a huge bandage over the wound. However, healing only begins if there is consumer and business confidence as credit markets will automatically unfreeze and businesses will start to operate. Confidence will only return in great force when people see we are over the hump with regards to the medical crisis. This can come when number of new cases past their peak with clear measures to manage further waves in place or where a treatment which reduces the danger of these is available. The latter may be closer than most think as there have been some interesting scientific developments over the last couple of weeks and if these bear fruit, it would change things substantially. However, we have still some way (and I would even say a long way) to go in the former, where the US is the big elephant in the room and woefully unprepared vs the rest of the world. Given that the US is almost half the world’s market in many industries, if it is ill with pneumonia, it doesn’t really matter how Latam, Indonesia or India do. So the key to this is to see how the medical crisis is unfolding in the US and how the development of treatments for Covid is progressing around the world.

    I have had some small and extremely selective buying of only sectors which have fallen a lot more than the market e.g. oil and gas and sold more than I bought last week because of the rebound rally. I am still hesitant on Reits because of the debt in a world where credit is frozen. Manulife mentioned that a 16% drop in valuation would cause them to hit the regulatory debt limit. 16% is frankly not a lot in this situation. During the 2008 GFC, property prices in some parts of the US fell 75% and there are those like Carl Icahn that say there is a US commercial property bubble this time round. Furthermore, even if not in default in paying interest, banks can still call in loans as in the Eagle Hospitality Trust case. Even with a strong sponsor, one may not be protected as huge rights issues may be used to raise cash as we have seen with SIA. So with these risks, the price needs to go lower before the risk reward ratios make sense for me with sufficient margin of safety. Many have forgotten than during the 2008 GFC, Reits prices fell 80%. We are a long way from this even though LHL has said impact on Singapore’s economy is expected to be worse than GFC.

    • Very good sharing, thank you for this Chan Mali Chan. I agree with most of your points above, I realise that subconsciously the reason why I am taking Buy Signal 1 to be triggered is that I feel that it is a matter of time before US gets COVID-19 under control, and I am essentially front running that peak.

      Whether this is true or not, we will see in the coming days. But to cater for the possibility I could be wrong, I think the best option for me is to flatten out the pace of averaging in – which I am doing by being catious about going into this market.

      That said though, one also cannot be too cautious, because if everything goes away quickly, the market could also pick up suddenly, so it’s about striking a good balance.

      Agree on CRE. I’m pretty worried about CRE markets this time around. I think there is real risk of a WeWork bankruptcy coming, and the impact this would have on global CRE markets would be bad.

      That said – I dont think this crisis will be as bad as 08 for the REITs. 08 was a freezing up of credit, and there was real risk many REITs would go insolvent. This time the banks are better capitalised, so blue chip REITs will still be able to refinance. The problem though, is that CRE prices may plunge, and short term cash flow will get hit very badly. And we haven’t even seen any of this start to play out yet.

  3. Another question worth asking is how the world would look like once we overcome this. Apart from the three mega trends you brought up; how would people change the way the live and work after this? What are the sectors and companies that will benefit from this brave new world?

    • Good questions – currents thoughts for me are that Tech will benefit bigly, and a lot of working habits are going to change (do we still need so much CBD space)? Love to hear what you think!

  4. I agree with CMC. The US is way behind on this. The lack of central leadership in tackling this health crisis is very disappointing. I think it be worse before better on this one.

    Stimulus is promising, but there’s also the issue of time lag / whether the stimulus actually the reaches intended target.

    My buy signals would be 1) when cases in the US start to blow out of control and the Center/ more states start to take it more seriously 2) when more numbers come out that show the shocking impact on the economy and 3) when companies start to report the hit to earnings and revising lower their outlooks (if they even give one at all).

    It’s really hard to model 2) and 3), because We have never seen “sudden stops” in economic activity like this, and have no idea how to model how this would look like! Expect to see more charts like the initial jobs claims one in the weeks and months ahead.

    So for me, when I see 1),2), and 3), I would say the downside risks are appropriately priced and appreciated by the market, and that is my signal to go in.

    In terms of timing I have been averaging in via small amounts using IB into US stocks (select names I have liked for a Long time) to use the low commissions to my advantage. Will scale in more aggressively if I see my signals play out. My allocation is currently ~50% cash and SSBs and the rest in equities.

    If I’m wrong, at least I still bought some when the night was darkest before the dawn 🙂

    • Thank you for the sharing! I agree there is risk of greater downside, which is why I’m averaging into this market as well.

      I think the problem with waiting for 3 is that the big impact will only come in Q2, and once Q2 earnings are released in July, we could well be past the peak of this crisis.

      Stocks are forward looking, and as investors we always need to look 3 to 6 months out to see where things will be then.

      That said, I also do agree that for now at least, I think markets *may* be underappreciating the fact that Q1 and Q2 earnings are going to fall off an absolute cliff. P/E ratios look good now, but wait until Q2!

  5. Awaiting the Second BLACK MONDAY crash is more exciting than waiting the TOTO HONGBAO DRAW result ,IMHO. Having held this belief, I have gone into US GOLD LEVERAGED ETF and accumulating. I am even thinking of playing BOTH WAYS with monies I can afford to lose, humbly.

    I totally agree with your honesty and intelligent thought processes and generosity to share your wise expertise with general public .In fact I have taken the liberty to share some of your ideas with newbies in investing when they asked. For this, I wish to express my gratitude to you for your kind sharing.

    It is also my HUMBLE OPINION from paying “tuition fees” that FEAR AND GREED are the 2 greatest motivators in investing. In fact the lesson I learn is that Big Boys make huge profits in a falling market from.SHORTING obscene volumes ( TESLA) .How else can DOW falls 30% in.10.days and Rebounds 20% in 3 days? Hence my above positioning for a second Black Monday.

    Ok, I really look.forward to.your next weekly article! Have a Profitable Week ahead! And THANK YOU VERY MUCH!

  6. Btw I have borrowed a ditty( more a favourite Childhood Nursery Rhyme when I was scared as a very young child) to decribe the ” central leadership” . Here’s to POTUS !

    Rain, rain, go away
    Come again another day
    Daddy wants to play
    Rain, rain go away

    Rain, rain, go away
    Come again another day
    Mommy wants to play
    Rain, rain, go away

    Virus, virus go away
    Come again another day
    Donald wants to play
    Rain, rain, go away

  7. Hi FH,

    One data point you may wish to have is that many health professionals consider the US to be the worst placed advanced country to control this virus and judge that it will be starting its Lombardy phase in the next few weeks, starting with New York but rapidly followed weeks later by New Orleans, Detroit and other cities. We are some ways away from peak infection there. Even Singapore is starting to struggle now despite our earlier success…the US will find it much harder.

    • Thank you Chan Mali Chan. I have thought about this point and I agree with you. I have updated the article accordingly (extracted below). Appreciate the frank sharing, this is what makes a great community!

      Update (29 March): Received some great feedback on why Buy Signal 1 may not have been triggered just yet. A bit of  context. With Buy Signal 1, most investors are watching for the peak, and it’s impossible to time the peak perfectly, so we need to frontrun the signal slightly. The way we did it was to watch for drastic shutdown measures being taken by the world (because this marked the peak in China).

      That said, having considered the factors, I do agree that Buy Signal 1 may not be fully triggered, but may be triggered only in the coming few days. Accordingly, I will be more cautious about averaging into this market – spread out my buying in curve.

      Thank you for everyone who raised the great comments. This is what the FH community is for! 

      This exchange has also made me realise the importance of coming up with a new set of “buy signals” so we know what to watch out for in the rest of 2020. Prelim thinking is: (1) Virus situation, (2) Fiscal and Monetary Stimulus, (3) Monetary in and outflow. Will beef up the framework in next week’s article.

  8. Hi FH,

    Good to see you receptive to different ideas and counter-arguments. I share the same thoughts as the other comments above on Signal 1. I know as investors we have to front run the peak here, and I do think the peak may indeed be near for Europe given the very firm measures taken over there and Italy’s daily new cases starting to flatten out (about 2.5 weeks after lockdown – just like China). But we have to be careful not to extrapolate what’s happening in Asia and Europe (and the Olympics postponement etc) to the situation in the US. The thing is: Most of what we’re “buying” are far more dependent on the US market and economy, so a lot more “weightage” for our buy signals needs to be assigned to how the US specifically as a country is doing, not Europe. You have clearly done that for buy signals 2 and 3, with more weight assigned to US fiscal and monetary response vs the responses from other countries. So why not do the same for signal 1 as well? On the virus containment front they seem to be in complete crisis in all aspects, not least their severe lack of leadership and lack of a central collaborated response like we saw in China, Italy, etc.

    Having said all that, I think it’s certainly the time to average in, say 10-20% of our intended investment, and I’ve begun to do so as well. I fully agree with you we need to be extremely selective here: Blue chips with strong balance sheets, in sectors relatively less affected by the shutdown, yet still brutally oversold over the last month, etc. This will be our hedge in the (low-probability) scenario that the virus situation in the US improves drastically and suddenly.

    I think your 3 buy signals are absolutely fine if they were signals meant for the first round of averaging in. You developed them weeks ago at a time when we were in complete uncertainty and no one knew when the fiscal and monetary help were even going to come in, and had those taken months we would not even be averaging in today at all. However, now that we’re starting to average in, I think it’s time to have a think about how our overall buying strategy through the next 9-12 months, how we “spread them out” rather than initial signals, so to speak. I’ve been thinking a lot about that for myself as well.

    Really looking forward to your posts each week.

    Zach

    • Hi Zach,

      Thank you for the well thought out comment, I really enjoyed reading this one.

      Yes, I agree with you and the commentators here that I might have jumped the gun slightly on the Buy Signal 1 – the right timing probably lies in the days ahead (which we are close to, but maybe not there yet). Agreed that I have placed greater weight on US/Europe for Buy Signals 2 and 3, and therefore Buy Signal 1 has to take into account the US condition as well, which is probably some ways away from the peak.

      Also agreed though, that’s now is probably the time to start averaging in slowly. Be selective, go with cash, and save plenty of dry ammo for the coming months, because high chance that things still get worse before they get better.

      On your last point – I’ve been thinking about this for a while too. The 3 buy signals works for the first phase of this crisis. But now that we are likely moving into phase 2, a new set of signals to monitor will be required. I have some preliminary thoughts on them (and how this guides our buying strategy for the rest of 2020), and I will work to refine them further over the course of this week.

      Really great point, and thank you for raising these.

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