Keep Your Winners

No matter your time horizon, risk tolerance or overall investing objective, buying high and selling low is never part of the plan. Investor psychology is a fragile thing - I won’t pretend that I am well versed in this arena, but it’s something we all have to remain cognizant about. There is a direct correlation between the level of volatility in the market and the amount of mental gymnastics we investors put ourselves through, in attempt to refrain from giving into fear. These comments may be received differently depending on your age or objective, but the overall message is concrete in its intention. Panic selling is not part of the plan. Managing risk is essential, stop losses are important and we as traders/investors need to know when our thesis is proven wrong. “Cutting your losers” is an important action, all successful managers and traders do it. But more importantly, we must “Keep our winners”. Nothing will do more damage to your portfolio, than selling your strongest names, even in a bear market! What companies are best positioned to not only survive a COVID-19 induced recession, but outperform the broad market?

• Are you holding stocks who have been responsible in raising cash during the late stage bull market?

• Despite the entire market being in the red year-to-date, are your positions confirming your thesis via price?

• Where is your stock trading relative to the 2018 lows?

• Leverage ratios? Buyback yield? (thank you airliners)

• Current credit facilities in place?

These are some of the questions I’ve been asking myself as I continue to assess the damage in stocks. It appears the consensus forecast is that stocks will retest the lows in the coming weeks. If this scenario plays out, the potential for stocks to decline even lower is a real possibility. Are you prepared for this? Are you clear on who your winners and losers are?

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I want to touch on a few areas of interest in this post.

• Light Crude Oil Futures

We’ve seen a more than -70% decline in Light Crude Oil Futures from its January 2020 high of $65.65 per barrel. This week we’ve seen crude drop below $20 per barrel for the first time since January 2002. Supply & demand at its finest; geopolitical tensions resulting in production increases, coupled with the obliteration of demand due to COVID-19, has led to one of the quickest declines in the commodity’s history. Comparing the current bear market in Oil to the 2014-2016 market, one should expect volatility to remain high, and counter-trend rallies to be quick, but generous.

It is of my opinion that increased government intervention will be needed, especially in the energy sector. Shale producers simply cannot maintain business with the commodity trading at $20 per barrel. If you are dumpster diving in energy, I’d be looking for companies who have the balance sheet capable of weathering the storm. The longer the US remains in “lock-down” the longer demand remains suppressed and prices remain low. I wouldn’t be surprised to see government bailouts in the E&P industry’s future. Just today, President Trump announced plans to meet with leaders of the Oil industry to discuss potential aid. It’s not a question of will they help - but how aggressively.

• Retesting the lows in stocks

Consensus among participants, is that a retest of the low is the path of least resistance. If you stop and think about it, it’s tough to rationalize why this market would NOT retest the low (but the market doesn’t care what we think). We don’t have a clear picture on the impact of COVID-19, earnings season is a couple weeks away, headlines are only getting worse, macro data continues to deteriorate, what is there to like? Well, I want to keep in mind that bear markets do not end on good news. History tells us the contrary, they end when the pain appears to be inexhaustible. Do I know where stocks will go next? Absolutely not, but the evidence points lower - for now.

There is a lot to digest in financial markets right now. I believe patience will prove to be our most valuable asset. If you’re sitting with high cash levels, there’s no need to try to market time. Why not wait until earnings season is over? Know your winners, know your losers, and know who your future portfolio candidates are. There’s a lot going on, both economically and psychologically, it’s important we stay out of the headlines and allow leading indicators to take the reins.

That’s enough from me.