Edition #178
Premium Market Analysis
Investors,
For the first time in several weeks, equity markets were able to break the downward momentum that we’ve experienced over the prior seven weeks. While I wasn’t expecting the magnitude to be this large, I’ve continued to express the possibility that the market would experience a relief rally higher. In Edition #175, published on 5/21, I shared the following:
“I genuinely wouldn’t be surprised for stocks to experience a relief rally in the near future (similar to the price action we experienced from 3/15 - 3/29/22), but I do expect to see continued pressure shortly thereafter. In a scenario where the market rallies, I will stick to the same plan I’ve been laying out to premium members: reduce exposure to lower-conviction names and non-core holdings while continuing to dollar-cost average (DCA) into high-conviction, long-term holdings.”
When I set a plan based on a core fundamental thesis/outlook, I can’t rotate 180° and become bullish on short-term dynamics when the market begins to rally. Investors who refuse to follow their original playbook are trading based on their emotions — a recipe for disaster in this industry. Is it possible that the market bottomed on 5/20/22? Yes. Is it probable? I don’t think so. As such, I intend to use this period to reduce my exposure to non-core portfolio holdings, de-risk, and continue to DCA into long-term holdings.
This DCA methodology that I’ve been advocating for will give investors upside in the event that the market does continue to rally higher. If the market falls lower from here, investors will be happy that they adhered to their plan to remain patient and steadily increase their exposure.
It’s important to recognize one key aspect of bear markets: Bear markets experience strong and fast market rallies to the upside. During these periods, speculative stocks experience larger magnitudes of volatility to the upside AND to the downside.
Consider the Ark Innovation ETF $ARKK, for example. Since $ARKK peaked in Q1 2021, it’s experienced the following rallies:
3/5/21 - 3/16/21: +22.8%
3/30/21 - 4/14/21: +19.7%
5/13/21 - 6/30/21: +36.3%
7/19/21 - 8/5/21: +11.5%
10/4/21 - 11/1/21: +17.6%
1/28/22 - 2/10/22: +21.7%
3/15/22 - 3/29/22: +39.2%
At the present moment, $ARKK has rallied another +29.3% from the 5/12 lows through the 5/27 close. Despite these amazing short-term returns and periods of massive upside, $ARKK is down -66.5% since the open on March 1, 2021.
This is the nature of a bear market, one in which investors get trapped by their emotions and the opportunity for quick upside only to see their positions quickly flip negative and continue to bleed. During these periods, smart investors are capitalizing on the emotions of less experienced investors who aren’t able to control their emotions.
In this newsletter, I’ll share more analysis on $ARKK, analyze key under-the-hood metrics for the S&P 500, and discuss more context about the S&P 500’s forward-looking returns after generating a weekly return of +6.5% or greater. In closing, I’ll analyze ongoing dynamics in the commodity market and how this might ripple through to the equity market.