Update - Friday 12/6/2020 - since this article was written we have started to make some significant asset allocation decisions - we want our Members and investors sleeping soundly this weekend. For our most recent wire CLICK HERE

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This article was written on Saturday June 6th

The Dow Jones is up 1290 points in two days. Three days ago we were talking about the disconnect between the US markets and the US economy (Main St versus Wall St) and now there’s another 5% of disconnection. In two days. Of course the Dow Jones is a bit of a joke index, it only has 30 stocks in it and it is price based rather than market cap weighted, but the S&P 500 is still up 3.8% in two days, is 47.51% off the bottom and the NASDAQ and the US Tech sector are through their all-time highs.

Our Futures are up 145 since Friday after rising 4.22% last week. And the Growth Portfolio we manage for our investors and Members ($55m) is up 31.47% from the recent low and has outperformed the ASX 300 Accumulation benchmark by 24.23% since the coronavirus hit on February 20.

As they say in Top Gun – “It doesn’t get to look any better than this”. 

I remember a time in the Tech Boom, in a morning meeting at the top of the market, when Andrew Bell of Bell Securities, interrupted the morning meeting, a frenzy of tech ideas, and just said "Stop, everyone. Just stop. Look around you. You (pointing at a young dealer) did $11,000 of commission yesterday. A year ago you were selling mobile phones. And you, you just employed a dealer's assistant. A year ago you were a dealer's assistant. So just stop and look around. It doesn't get to look any better than this in the stock market". It was the top of the Tech Boom and the Tech Wreck was just about to start.

Yes this could all reverse. But we’re not selling. Not yet. Fearing a sell-off just because the market has gone up, is human nature, based on a perpetual fear of mean reversion. Its why humans are not natural investors, its why investors buy at the top and sell at the bottom.

The coronavirus has been an extraordinary stock market opportunity but its not over yet and we are riding it all the way, but we have, for the first time in two months started talking about whether the market, and our individual stocks, are overbought rather than oversold.

GETTING MORE OVERBOUGHT THAN OVERSOLD

There is a mounting commentary about the ‘Disconnect’ between the equity market and the economic reality. As an example, this week a CNBC commentator called the recovery the ‘Mother of bear market rallies’ – another said ‘valuations are just ridiculous’. Not that we would invest on what one attention-grabbing talking head on CNBC says, but it's of value to you as investors for us all to note, that we are moving from ‘oversold’ commentary to ‘overbought’ commentary.

The market is getting overbought in the short term (Daily charts). Here is the regular Heikin-Ashi chart of the ASX 200 on a daily basis. You can see the RSI in the bottom chart over 70. In fact its over 80.

50 stocks in the ASX 200 are overbought:

Notably its not overbought on a weekly chart, in fact its only just given us a buy signal on a weekly chart. Weekly charts are slower moving and are good for identifying the big market pivots points rather than the smaller trading opportunities. They are what ‘investors’ might use instead of traders. Here is the weekly chart of the ASX 200. The RSI is only 47 and rising.

The herd isn’t worried about the sell-off yet, but after the biggest 50-day rally in 75 years it gets easier to take a profit than buy more. The air gets thinner at altitude and it's easier to pass out. When people are sitting on big profits, they become more sensitive to the negatives than the positives.

So let's just note the heightening risk, although we’re doing nothing about it. The herd isn’t bothered so we won’t do any selling in fear of a sell-off that hasn’t started, but we have discussed the possibility that we may have to turn our focus away from recovery and consider the possibility that the market runs out of gas.

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Lawrence Livingston

Bam!

Carlos Cobelas

the old saying that the market can remain irrational for a lot longer than you can remain solvent certainly applies now. go for the ride if you like, but this rally has gone far longer and higher than is justified and is ignoring the severe economic consequences of the COVID pandemic, pretending that recession will be quickly and fully reversed. By the way, a major medical research organisation has estimated the chances of an effective commercially available vaccine within the next 12 months as 9%.........

Andre Louw

How will you know that you have ridden it all the way and that it is time to dismount this bucking broncho before it throws you off?

Marcus Padley

Hi Carlos - You can't invest in volatile markets using a long term timeframe. Your declaration is too long term, you are simply going to avoid the stock market in fear and do nothing with that view. Meanwhile this has been a huge opportunity. In the last eight weeks we have made our investors $15m (in a $50m fund) and outperformed 23%. When it turns we will spot it and do something about it. Until then professing long term fear is pointless. One day you may be right, but between now and then the job is to make money playing both sides of the equation whenever appropriate. That's our job. We can't do that if we allow ourselves to be spooked by something that hasn't happened yet. The stock market is not about making predictions, its about making money.

Marcus Padley

Hi Andre - Subscribe to Marcus Today and you'll see how we do it. In a Team (not alone), with hyper-vigilance, an open mind, the ability to go to cash, a preparedness to go to cash, and constant re-assessment, constant work. You can follow what we do in our daily podcast and in our newsletter if you subscribe.

Mark Dawson

Hi Marcus, this chicken is selling up! I haven't laid any golden eggs, but have made good gains over the past few months. It's time for me to sit back and enjoy the action from the sidelines for a while. Maybe I'll miss out on some more upside, but that's okay with me. The market seems illogical at the moment and I don't like the disconnect with the share market racing North, while reality seems to be heading South. Thanks again to you and your team for another excellent article. I'm going to watch Star Trek. I do love Spock.

Marcus Padley

Hi Mark - Yes - as of yesterday we sold a few technology stocks and after the 3.1% fall today (11/6/2020) we will also be making some new asset allocation decisions tomorrow.