What Comes After The 40% Surge

Summary

• The S&P 500 has skyrocketed by 40% in roughly 5 weeks.
• There is no shame in taking profits after extraordinary gains in this market.
• Volatility should continue to provides significant opportunities for active managers.
• Despite "some" uncertainties surrounding stocks, there are some remarkable bright spots in the market as well.
• This idea was discussed in more depth with members of my private investing community, Albright Investment Group . Get started today »

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The S&P 500/SPX (SP500) has appreciated by about 40% since its mid-March bottom.

Source: StockCharts.com

Why does this market continue to climb higher? After all, this is with the U.S. unemployment rate approaching 20% and with riots raging across the country. Furthermore, 40% rallies in a 5-week period is not a typical phenomenon.

Will the SPX continue to go higher?

I think so, but "only" to around the 3,150 level. It's likely only a matter of time before stock prices become more reflective of the real economy. Continued coronavius disruptions should contribute to an unpredictable and unstable economic environment going forward. Furthermore, technical factors suggest that the SPX will get quite overbought if it reaches my higher-end target of 3,150.

We can already see the RSI well above 60. Elevating the market to 3,150 should put the RSI firmly in the critically overbought category (70-75).

Therefore, it seems quite plausible that we will see choppy, volatile price action for some time in the SPX as well as in most equities in general. In fact, the SPX could potentially retest the mid-March lows, or roughly around the 2,400-2,500 level, before a W-shaped bottom is put in later this summer.

No Shame in Taking Profits

There is no shame in taking profits in any market, but especially in this one. In this uncertain atmosphere, it is better to lock in solid gains rather than watch them decline or even disappear completely (in a worst-case scenario). Furthermore, there is always the option to buy back into a stock at a lower level. Therefore, after abnormally sharp profits in several sectors, we recently decided to realize some profits and do some re-balancing in our portfolio.

Recent Positions

Banks - This group was enormously oversold and was selling at a remarkably cheap valuation relative to its future earnings potential.

Financial ETF (XLF)

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This was around the time when we were accumulating some key banks like JPM, Goldman Sachs (GS), Wells Fargo (WFC), and the SPDR S&P Regional Banking ETF (KRE).

We got out of this trade approximately 8 days after this sector had bottomed.

JPMorgan (JPM)

In just 8 days, some of these banks returned 20-30%. Now, we can probably use a pullback, but banks are essentially showered with limitless capital. Thus, they will very likely benefit from the perpetual money printing environment over the long term.

Source: Albright Investment Group

We still like banks longer term, but there could be sideways or downward price action in the short to intermediate term.

Other Exits

We also exited General Electric (GE) and Boeing (BA) after picking up shares near the recent bottom. I think that stocks like GE and BA have potential to grow long term, but it will likely require quite some time to turn these companies around.

More Bright Spots

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Our gold/silver/miner (GSM) segment had remained one of our favorite and heavily weighted sectors for over a year now. GSMs remain steady at about 20% of portfolio holdings, and this sector has surged by around 43% so far this quarter. With the Fed's policy to continuously expand its balance sheet and the fiat monetary base, GSMs as well as Bitcoin and certain other digital assets should do quite well going forward.

GSM Portfolio Q2 2020

It's Not All About Bitcoin, You Know...

Notable Leaders in the Digital Asset Segment

Cardano (ADA-USD)

Source: Binance.com

ADA/Cardano surged by about 40% inside of one week. This was a good time to realize profits after this extraordinary move. There will be an opportunity to buy back in on a notable pullback, in my view. We see more upside potential in this name after a moderate pullback of around 20% occurs.

Ethereum (ETH-USD)

ETH was up by 30% in about a week. It may be time for a slight pullback or a consolidation period, but the overall uptrend looks very constructive for Ethereum.

Link (LINK-USD)

Link is another name we recently took profits in after a 30% move in just one week. We can see that it is not all about Bitcoin, as the gold standard of cryptocurrencies appreciated by only around 10% in this same time frame.

Bottom Line

Our portfolio strategy remains cautious regarding stocks in the medium term. However, we are bullish on GSMs in the short, intermediate and long term. Also, while Bitcoin (BTC-USD) and other digital assets are likely to remain relatively volatile, they could appreciate significantly in the intermediate and long term. Our portfolio holdings include about 20% GSMs and roughly 20% in non-GSM stocks and bond ETFs.

We also have a considerable Bitcoin and digital asset position split up around 20 digital asset projects. After some recent profit-taking, we have accumulated a substantial cash position as well, which we plan to deploy towards equities at lower levels sometime this summer.

Our Q2 portfolio results over the first 2 months of this quarter

Disclosure: QTD our diversified portfolio is up by roughly 30%, and our YTD return is approximately 32%.

Analyst’s Disclosure: I am/we are long DIVERSIFIED PORTFOLIO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I am/we are long assets mentioned. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Comments

[GameBuzz]

Thanks for noting the GSM abbreviation this time. New readers will appreciate it. (Every article is someone’s first.)

[Benni]

This week is profit taking week, I plan to make a nice tally, 25% or so.

[KALSTATE]

DO LOOTED BURNED OUT SMALL BUSINESS OWNERS WISH THE 82ND HAD BEEN AT THE FRONT DOOR?

BUSINESS MIGHT THRIVE IF U WERE NOT IN THE BURN ZONES!

[techy46]

The 20% drop WWWWW !

[topluso]

The bull still has legs to run for a few more months. Then the election risks and Democrat control of government and their high taxes and stock market hostile policies will kick in and a sell off will happen before November. Get out before then. It's the best advice you'll get all day.

[Ta0]

@topluso
Wouldn't it be a great time, after the crash, to rush in and buy at rock bottom prices, all the great companies? Keep cash ready.

[KALSTATE]

@Ta0
DOGS

My wonderful dog was murdered by a car when I was 8.
I cried an entire day.

[SilverSun]

I am a dividend investor. Stock price increases are of course very welcome, but I am increasingly considering selling most positions that covered in 3 months my year dividend projection income. I ve made some considerable profits in the last months.

The risk is that I might lose a possible bull market craze. However, I think that it might be better to put today's profit in a market that has stabilized (vaccine, treatment , who knows), probably at a higher valuation, than risking probable losses.

[Illuminati Investments]

Sell some calls on those positions (if you have 100 share increments).

[More of that]

Then you will know that dividends are likely to be pressured for some time as earnings will be down in most cases. It really depends upon what companies you hold.

Demand : not so many will want to fly, not so many will want a cruise, not so many will go to restaurants, not so many will want a package holiday, not so many will go to the gym, not so many will go to the spa, ... not so many will want to make big risky purchases, ... Everyone I know with money is cutting back and acting cautiously. The only people that are not acting cautiously are the sock puppets who are busy pumping stock markets.

Productivity: downsizing and social distancing have negative impacts. I have 2 clients who are not bothering to restart . They need 80% seating capacity to keep their restaurants open.

Insolvency: there is no escape that many businesses will fold. Let's hope that debt defaults do not spiral and create a domino effect.

[Donggle]

@SilverSun If you are selling to protect principal, you are not a dividend investor.

[Gordbuffett]

As of last week, 94% of stocks in the S&P 500 were above their 50-day moving average. That is the highest level in 20 years. Don’t fight the tape. 94% is by definition very overbought, so that suggests some consolidation is in order in the coming weeks. But overbought in a bull market is something entirely different than overbought in a bear market rally.

Meanwhile, the Fed continues to pump liquidity into the market, with a promise to do much more if needed. Don’t fight the Fed. The Fed’s balance sheet is now $7+ trillion.

Fundamentals are in the tank, technicals suggest very overbought.

But here’s the bottom line: Don’t fight the tape and don’t fight the Fed.

[Diesel]

Fed's balance sheet will soon pass $10 trillion but it's no big deal. Keep the party going baby.

[Ta0]

@Diesel
Damned if we do and damned if we don't. What the hell else do we do??? 😵🥴

[TaiPan]

@Ta0

Exactly. And I heard this type of talk when quantitative easing kicked in back in 2009 -- dire prophecies of inflation and stock market crashes. Neither happened.

So many analyses seem clever, thorough, and wrong. Don't fight the tape, but put stop limit losses in place in case you're wrong.

[Green Jacket]

From now on everybody is " chasing the market " . If you are not a professional day trader the market can burn you. Both, bears and bulls, will prove to be right but at different times.

[Benjamin Graham Cracker]

I would say the only way the market burns you is if you're an active trader. Otherwise, doing nothing at all is the best trade you can make. Buy more when the VIX is high and all those "traders" are filled with fear of losing their jobs (chasing anything that works). Easy.

Day traders just provide liquidity for long term investors.

[Ta0]

@Benjamin Graham Cracker
But wouldn't a crash in the market, caused by a second great depression, also affect sleeping long holders? It's not completely risk-free, even if you do nothing.

[bull_rider]

@Benjamin Graham Cracker
All the people who got scared when this virus crash hit, and sold out their positions at a big loss, are now ready to buy back in with their dwindled resources at higher prices than they sold at. They managed to lose money when the market went down, and when it moved back up without them.

Those who had faith in their investment strategy will find themselves where they started before too much longer, in most cases, plus possibly with additional dividend-reinvested shares at the lower prices.

[toromi]

"In fact, the SPX could potentially retest the mid-March lows, or roughly around the 2,400-2,500 level."

Of course it could -- almost anything is possible. But with the Fed backstopping almost every asset class and assuming we don't have another major, exogenous, negative event, how likely is it?

[Green Jacket]

@toromi Japan has been printing money and pumping the market for 20 years and whoever was invested in Japan made 33% in Japanese Yen, but lost 80% in gold terms . with the Nikkei stock index at 15,000 in year 2000 you could buy 53 oz of gold. now with Nikkei at 20,000 you only can buy about 11 oz of gold.
With the Dow Jones at 11,000 in year 2000 you could buy 38 oz of gold , now with the Dow jones at 25,000 you only can buy 14 Oz of gold.
Money printing is ok to keep people busy but not for investors .

[jimbo162]

seekingalpha.com/...

[nick name]

Thanks for a good article. But can you really neglect the actions of FED? Without FEDs actions, the stock market would likely be close or even below the MA50 (of that in such a case).

It is nearly always a good idea to look at the technicals, but dont you think that if the stock market starts dropping again, the prices will again (and at a much faster rate) be manipulated by FED?

[oblongowl]

I find it odd to recommend taking profits when stocks fell 30% before this remarkable climb back which effectively takes back to base. As long as one has cash on the side it is surely better to Hold for the next sign of double dip and begin to increase the holdings as it drops again.

[g18]

Great if all that active positioning nets one alpha.

How many really do it well over the very long-term?

[Sundance Utah]

Doesn't matter what others do, only what you do.

[5ofDiamonds]

Goldman Sachs predict SPY to oscillate between 2750 and 3000 this year. I do plan to buy with SPY under 2800. Meanwhile, I will selectively buy businesses as they report Q2 results @Victor Dergunov I do think that Q2 results when announced will create some buying opportunities.

[User 16582472]

"There is no shame in taking profits after extraordinary gains in this market."

Trust me, you'll feel plenty of shame when the market is up another 10% by Friday. Today was a great day to take advantage of the pullback in DKNG and GAN, for they will be higher tomorrow and even higher by the end of week. Tomorrow is a good day to pick up CRWD, ZM and ZS at market open and ride them higher to close.

[WeC]

Capital preservations supersedes gains in any investment playbook.

[THeOracle13]

Looks like everyone and their mama is buying stocks because it will go up... Chill out build cash and wait for 2nd quarter, then 3rd and 4th... It will drop.... This will be the real fireworks...

[cleansheets]

All the smart guys have been wrong about the stock market for months. Only the idiots have been correct.

[User 16582472]

Yup, idiotic me on my idiotic yacht with the idiotic helipad.

[g18]

Bottom line: As long as one makes money and can do it consistently over the long-term, all's good. It doesn't matter if one is smart or not so smart. Just like it doesn't matter whether this is a bull market rally or dead cat bounce.

[tommy2001]

if you said market is in ATH with 40 million unemployment in anytime of US history, yes, you will be believed an idiot. but Fed makes idiot win. in my opinion, JPowell is due for an impeachment for creating unprecedented market bubble by destroying US economy fundamentals.

[User 51209906]

50%

[13427872]

GE Recovery Underway According to Global Equities Research -- Market Talk
BY Dow Jones & Company, Inc.
— 10:26 AM ET 06/02/2020

10:26 ET - General Electric's (GE) business has hit bottom and recovery from the coronavirus pandemic is underway, Global Equities Research says. The conglomerate has around a $400B backlog, which makes the current stock price "very inexpensive." GER keeps a $21 price target, noting that GE deliveries and installations are restarting, as well as bidding on projects and deals. The research firm tells WSJ it doesn't see signs of a second wave of Covid-19 that could disrupt GE's recovery, or any other major risk for the company at the moment. GE rises 4% to $7.03. (paulo.trevisani@ wsj.com; @ptrevisani)

(END) Dow Jones Newswires
06-02-20 1026ET
Copyright (c) 2020 Dow Jones & Company, Inc.

[team Gabe]

could be a good time for hedging
seekingalpha.com/...

[scott1480]

Don't expect a pullback. Everyone is barking the same story which is why it won't happen for a while. The Fed is back stopping the market and essentially removing market risk with QE unlimited. If the market goes down the Fed promised to support. Better get on the train before it takes off because it can't coming back for awhile.

[Sundance Utah]

The Fed is not backstopping the market. They are propping up the bond / debt markets and everything else is inferred by conditioned BTD investors. The fed may backstop the market if it declines 50% or more. Why would Wall Street or the Fed want equities at these elevated prices after an 11 yr bull run, when they could pull the rug out anytime and get those equities half off or more? The Covid excuse Is already out there as the rationale for a major market correction, and the Fed is not the bad guy this time. Remember, markets are a wealth transfer mechanism from all of us, to them.

[Bo Didley]

the trend is your friend.

[user43812966]

Agree in general, but if you are exiting GE here, it has barely moved off the bottom so where did you enter i.e. did you take a loss or a small gain? And if a small gain, why even enter if your target price was so low?