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Bottoming signs but not out of the woods…

In the midst of the COVID-19 health crisis the economic crisis unfolds in parallel.  The markets continue to pile up records both bad and good.  Record volatility, fewest trading sessions to bear market, biggest 3 day loss… Biggest 3 day gain, etc.  Whenever we face an economic crisis, one on such a scale that it leads markets to bear market territory we need fall back on some history to guide us as to how it might play out.  Each crisis may have its own unique circumstances but the action displayed in markets historically has shown similarities we can use to help us with any portfolio repositioning if needed.  Bear market bottoming is often a process as opposed to an event and this process has phases.

We believe this bear market will exhibit 4 distinct phases: Panic sell-off, Relief rally, Disappointment retest, Recovery.  While this market may play out along these lines, it is by no means a science.  The depth and heights of each phase are only clear in hindsight.  In addition, the duration of each phase as well is unclear in real time; again, most evident after the fact.  Our belief is that we have completed phase 1 Monday midday setting the panic low that accompanies worst case fears, uncertainty and forced selling.  Some good news: The past few days are strong evidence that the markets have rapidly entered the relief rally with the S&P recapturing nearly 40% of the high to low losses in a short 3 days.  How long this phase lasts or how far it goes is impossible to know.  We are intent on using this relief rally to lighten some stocks we feel may have a tougher recovery given the changes this crisis imparts on the US and world economy.  Where appropriate, we may also switch like-industry stocks for tax-loss harvesting or to upgrade to names that may face fewer near term and recovery headwinds.

The best news is that on average we had compiled more cash than ever prior to the crash.  We will be using phase 3 to meter that cash earmarked for long term investment into securities that are trading at significantly lower prices than a month or two ago.  Stay tuned for more information as news rapidly unfolds.

As always, stay healthy and safe.