Indicators to get you back to the market?

[tdv2]

The market capitalization of Microsoft, Apple, Google, Facebook, and Amazon is higher than the bottom 350 stocks currently in the S&P 500. How long can that bubble continue?

I would agree that the S&P 500 is becoming top heavy with these names. Today was a rare instance where all of them are down but the index as a whole was up almost 1.5%. How long can it continue? I have no idea but it could be a very long time.

 

[Freedom56]

I would agree that the S&P 500 is becoming top heavy with these names. Today was a rare instance where all of them are down but the index as a whole was up almost 1.5%. How long can it continue? I have no idea but it could be a very long time.

Many of the stocks going up today were companies in a a deep bear market. I can't take a 10% move in Macy's stock too seriously. Financial stocks were up also today but many of them will not be able to support their dividends going forward and the real bad news is yet to come. We are still in the early innings of this bear market.

 

[targatom2019]

I would agree that the S&P 500 is becoming top heavy with these names. Today was a rare instance where all of them are down but the index as a whole was up almost 1.5%. How long can it continue? I have no idea but it could be a very long time.

Isn't that healthier for the markets ?

 

[tdv2]

Isn't that healthier for the markets ?

I guess you could view it as healthy. Could just be mean reversion. A Goldman Sachs strategist wrote a note last Friday stating that the narrowing breadth of the market could be indicator of lower future returns. More technical analysis for those so inclined to believe it. Here is the article.

https://www.bloomberg.com/news/arti...rrow-breadth-in-s-p-500-a-bad-sign-for-stocks

 

[MichaelB]

I have no idea what the "correct " level is for equities right now. The Fed is buying high yield fixed income, they seem intent on backstopping asset prices, and the ECB is right there as well. It's safe to assume a fair part of all the newly printed money being spent right now is or will flow to corporate coffers. When the world central banks throw their collective weight behind financial assets, it's a risk to not be there.

 

[walkinwood]

I have no idea what the "correct " level is for equities right now. The Fed is buying high yield fixed income, they seem intent on backstopping asset prices, and the ECB is right there as well. It's safe to assume a fair part of all the newly printed money being spent right now is or will flow to corporate coffers. When the world central banks throw their collective weight behind financial assets, it's a risk to not be there.

Wasn't there a quote during the internet boom "Don't fight the Fed"?.

Not saying I know what that means.. just a fragment from my memory.

 

[Badger]

I took a hefty chunk out of equities prior to the initial drop. I was not comfortable with the market's ability to continue an upward climb after so many years. Will I get back in? Eventually. I have automatic "buys" set up for when any of the stocks get to the low price I have established. If it doesn't get low enough then I still have my cash from selling high that will keep me going for a few decades. If it does get to my price then I will get some fire sale prices. I'm not going to waste time following the market every day to try and determine when would be a good time to get back in. Instead I will sit back relax with my good fortune at selling before the market got one foot in the toilet and wait to be contacted when I get a good bargain.


Cheers!

 

[brewer12345]

Brewer - can you share your strategy on junk market crash? (Truth be told I don't even own a broad bond fund at the moment, just Treasuries)

There is an obvious no-brainer buy signal in a crash, generally when spreads get over 1500BP. You can then either pick through the wreckage for unconsidered trifles, or buy a broad index and let the huge excess spread cover the inevitable default losses.

I have a background as a credit analyst so I like picking bonds. To offer a simplified example, imagine a company that has 1Bn in EBITDA in good times and that crashes down to 400MM in a recession. The equity trades down to a pittance and the 3Bn of bonds plummet to 50 cents on the dollar. If your analysis indicates that 400MM is likely the trough EBITDA number give or take, you might be interested in the bonds. Why? If the company makes it, the bonds will cruise back to par giving you a double on your principal and a double digit cash on cash yield along the way. If the company hits a wall and goes bankrupt (maybe 1Bn of the bonds comes due and they cannot refinance), you hold the bonds through bankruptcy. Why would you do that? Simple. at 50 cents on the dollar, the bonds are worth 1.5Bn at market. If 400MM is the trough EBITDA and the bonds are converted to the equity f a debt free company, you just bought equity in a business likely to see rising EBITDA for a less than 4X multiple. Since most companies trade at a 6 to 12X multiple and EBITDA will likely rise, you will generally do very well.

I haven't really seen attractive opportunities in junk yet. I have bought a grand total of one small position where the bonds were a little more expensive than I would have liked, but they were mortgage bonds where the collateral at market value covered the market value of the bonds and cash flow was very good. Need the junk market to go over Niagara Falls in a barrel again before I start buying. It will probably happen soon enough, so I can be patient.

 

[kgtest]

I learned a valuable lesson in 2008/2009. I had a lot of cash on the sidelines. I kept waiting for the all clear sign, but if folks remember those times, there was talk of much pain yet to come. I listened to that stuff when I should have at least dollar cost averaged back in. Strategy over emotions.
By the time I was back to fully invested in 2011 I missed a lot of the gain.

THIS!

That's why I just ride the DCA wave, buy every week, wether it was a glorious week or a slaughterhouse. It all averages out over the long term. I think this strategy works for other people as well...so don't just take my .02

 

[atmsmshr]

There is an obvious no-brainer buy signal in a crash, generally when spreads get over 1500BP. You can then either pick through the wreckage for unconsidered trifles, or buy a broad index and let the huge excess spread cover the inevitable default losses.

I have a background as a credit analyst so I like picking bonds. To offer a simplified example, imagine a company that has 1Bn in EBITDA in good times and that crashes down to 400MM in a recession. The equity trades down to a pittance and the 3Bn of bonds plummet to 50 cents on the dollar. If your analysis indicates that 400MM is likely the trough EBITDA number give or take, you might be interested in the bonds. Why? If the company makes it, the bonds will cruise back to par giving you a double on your principal and a double digit cash on cash yield along the way. If the company hits a wall and goes bankrupt (maybe 1Bn of the bonds comes due and they cannot refinance), you hold the bonds through bankruptcy. Why would you do that? Simple. at 50 cents on the dollar, the bonds are worth 1.5Bn at market. If 400MM is the trough EBITDA and the bonds are converted to the equity f a debt free company, you just bought equity in a business likely to see rising EBITDA for a less than 4X multiple. Since most companies trade at a 6 to 12X multiple and EBITDA will likely rise, you will generally do very well.

I haven't really seen attractive opportunities in junk yet. I have bought a grand total of one small position where the bonds were a little more expensive than I would have liked, but they were mortgage bonds where the collateral at market value covered the market value of the bonds and cash flow was very good. Need the junk market to go over Niagara Falls in a barrel again before I start buying. It will probably happen soon enough, so I can be patient.

Thanks brewer12345! Sounds sorta like Greek and Italian bonds during 2012. Since I do not have the abilities to pick through this kind of wreckage, may make a small wager on a junk index. 1500 bp seems like a real panic point for a market.

 

[COcheesehead]

I have made some in junk bonds, about 6%, in the last 30 days. I really made some, about 25%, in small cap growth.

The trend is your friend.

 

[The HalfBreed]

Simply Put....

It's Time IN the Market.
NOT Timing the Market.

If one has to dodge in and out of the market because they are scared, your asset allocation is all wrong and you must look yourself in the mirror and decide what's right.

I have a time frame that I decided on back in 1987 during Black Monday.
I doubled down on my investments into the market during the 2008-2009 crash and have stayed the course.

I retired in 2012 and am still heavily into stocks (TSP C, S, I Funds) and have seen a 32% drop. It's still double what I had when I retired in 2012, and I haven't added a penny since 2012.



I'll decide in another 3-5 years on what to do (I just turned 65 last month).

My Crystal Ball is in the shop, along with everyone else's.
Find your comfort level and Asset Allocation and decide at that point in your life. It's hard to move from phase 1 and 2, to phase 3 (Safety) where one is satisfied to get 3% and be done.

We have an old saying...."If you've Won the game, QUIT PLAYING"

 

[RobLJ]

I have no idea what the milestones should be, but I'm sitting on 3X my normal cash, so for every 5% down, I plan to put 2-3% of cash to work.
Normally, I have rebalanced with a 5-8% band but my part-time online gig runs out and I have 4.5 years to full SS age, so I see the next 4 years as the big risk in terms of adverse returns, so I've reduced from 58% to 48% stock funds over the last 2.5 years, scraping gains as the S&P went up.
3rd week of February I sold another slice, then when the quick drop over the cliff brought me down to almost 40%, I bought 3.5%, then sold a bit last Friday.

I don't want to go below 40%, so I'll be buying back in increments.
Most of this is like Brewer and others, I suspect the market as considerably overvalued; on the other hand is the massive Fed backstop. I'm not sure the market is pricing in a continued wave as we reopen or a bad Fall wave, as in the Spanish flu; I have no idea whether the 1918 is a template for this one, and perhaps we will get a vaccine in a year.

Over the next year (perhaps 2) I don't think the consumer/business investment is going to rip for a V shaped recovery; if we're lucky U shaped perhaps. But that's just a guess. Anyway cash will get me at minimum to 2024 and SS before I have to sell stock to fund expenses, then I can increase the stock allocation to 55-60% from 2024-2028 when DW claims.

 

[acronymous]

Thanks brewer12345! Sounds sorta like Greek and Italian bonds during 2012. Since I do not have the abilities to pick through this kind of wreckage, may make a small wager on a junk index. 1500 bp seems like a real panic point for a market.

Newb question: Is 1500bps the spread between short and long duration junk or spread between same duration junk and treasuries? Thanks!

 

[mountainsoft]

What are the market indicators that you'll use to decide when to jump in?

As they say, Time in the Market is more important than Timing the Market.

I never jumped out, so there's no need to jump back in. I'm 3-4 years from retiring and have a 50/50 investment asset allocation. My investments dropped 15-20% or so at the lowest point, but they've already been edging up again. It's no fun watching it go down, but it's exciting to see it go up again. Still, I expect it will go up and down quite a bit over the next year or two.

I did transfer $10K from my taxable investments just as COVID was starting to have an impact so we could have more cash on hand if things went south. So far though, we haven't had any financial issues to worry about. If anything, we've spent more since we've been at home.

I've already maxed out our contribution limits for the year in our retirement accounts. If we have any extra cash on hand I might invest it in our taxable account, but I don't really pay attention to the current market state when doing so.

 

[OldShooter]

Newb question: Is 1500bps the spread between short and long duration junk or spread between same duration junk and treasuries? Thanks!

Spreads are usually quoted relative to Treasuries. Here is an example:

​

I'm not sure what the exact as-of date is for this chart. I got it in a briefing a week or two ago, so it is definitely not April EOM.

 

[rtroxel]

For me, the question is: Do these companies pay dividends?

If they do, I stay with them, even if they fall temporarily.

 

[bmcgonig]

Buffett:

"@WarrenBuffet on
Why he's not buying stocks in size: sensitivity to tail events and the '08 reminder "we don't see all the problems the first day."
On whether others should buy now: Only if you expect to hold for a long time and are financially and psychologically ready to do so"

https://twitter.com/x/status/1256721051465035777