The majority of investors still don't believe this rally

So the Small Ords has been on a tear. We know when the GFC was over these stocks had the biggest recoveries & rallied multiple times off their lows. Having owned a few small caps back then, I remember the rallies were beyond anything I would have ever imagined

For instance, Emeco bottomed at $1.47 in Jan 2009 & by September 2009 just 9 mths later had traded to over $9.00 or a rally of +512%, so when the small caps come back into favour later on we will see some massive rallies off the lows that we saw a month ago.

Or Magellan traded to a low of 30c in Feb 2009 - I had sold mine back in November 2008 at 45c - so was feeling pretty clever on that .. well turned out to be a shocker selling them - because when they turned they went back up & by Sept 2009 were back to 72c & as we know they never stopped. I learnt a lot back then about holding stocks long term & not trying to trade them & think you can buy them back later.

If they don't fall - as you & many others expect - then you have missed a great buying opportunity. Whoever bought my Magellan back at 45c may have been feeling sick when they traded to 30c, but if they held - then when the V came they were already set.

While others may have sat back waiting, as many, and I mean many, investors are doing right now:

  • "Everyone" knows this rally is unsustainable - as many argue - its just a classic bear market rally - one for all the suckers .. A reality check is coming ..
  • "Everyone" is very long cash & ready for the selloff !
  • "Everyone" knows that the eco data will be so horrendous (did you know some will be as bad as the Great depression) that as soon as 'investors see that" they will all panic & mkts will get smashed - as soon as it hits the wires.
  • "Everyone" is waiting for the US mkt to "re-test" its lows - then - and only then - it'll be a safe time to buy ..

If this eventuates - then this is wonderful for them - as they are cashed up & ready to buy some of the best bargains seen in a decade.

The only problem is when everyone is expecting something - it doesn't always happen...

The market rally from March 2009 during GFC was not believed

  • Many stocks (especially the Small Caps) were rallying very hard off their lows from March 2009 - while the GFC was still going & many at the time thought those rallies were ridiculous.

  • So, the big question is .... are we again been seeing it this time ?? 

  • But this is “not the playbook” that many fund managers are playing – they are looking back & saying – well this is like the GFC - but this is much worse – this is (ok here’s that word again – the one that has stopped so many from buying stocks & sitting on their cash) -- “unprecedented”

  • It’s so bad– worse many have (falsely so far at least) claimed than the GFC - so they strongly have always thought - that given that mkts bottomed at down -55% back then – then - and this time is so much worse - then this time that is “at least” where we should go.

Has the rally simply been the "textbook" bear mkt rally ??

Only time will answer that -

  • Well the bad news (for any bears) is that we had one of the fastest -30% drops ever seen – but at the same time we have so far seen one of the fastest - share market recoveries - ever seen.

  • As I pointed out as mkts were in free fall, the amount of 'forced selling' was massive & that saw normal daily value of $7b surge to $18b & even peaked at $20b a few days before mkt bottomed. That forced selling saw mkts hit a lot harder & as a result as soon as that selling was finished - we saw mkts rally hard off those lows..

  • Now many will say – but it’s a “classic - text book - bear market rally - surely you can see that” - everyone knows that & it happens every time after a big drop.

  • Ok quick question – if the “bear mkt rally” - that was apparently was so obvious – then why didn’t they load up on stocks – with all the “pile of max cash” they are holding & then just sell this rally??

  • The reason is that all the bears were so bearish & could see nothing but bad news - that they were not like many who have been “suckered in” by this rally..

  • Ok those who have been suckered in - can now sell & go back to cash or just stay long & be happy with the cheap prices that we all bought stocks at on the way down.

  • Given most stocks I bought (on the way down - but not right at the bottom - was fully invested before that) I’m happy to hold for years – so then why sell & try & time a perfect re-entry at lower prices.

  • I still expect the mkts will have selloffs (that’s just a normal function of mkts) – but - my difference with the bears - is that these selloffs that will come -will not be all the way back to where they were before – can’t see that.

This has been a ”massive shock” to the system but...

  • Like many other “crisis events” I talked about in detail 6 weeks ago – and like all the others - the mkts recovered well off those lows EVERYTIME !!!!

  • Ok some stocks we all bought a touch early and some a few weeks before the low, some a week before (none at the low – was too scary at the time to even think of buying then – mkts looked just dreadful that day & some were seriously freaking out).

  • But as I have often said – I may not get the low, but I always like to be buying cheap stocks on the way down– because when they bottom & the rebound is on. It is often a V recovery in many stocks off their lows & if you are not set on the way down - then it’s very very hard to buy a stock as its rallying all the way back up– knowing that you could have bought is a few weeks earlier -30% or -50% or in some case -75% lower than where they are today – just 6 weeks later…

Everyone is a buyer of stocks "next time" they get sold off...

  • So what you do now is say to yourself – ok –those prices were so cheap - that next time the mkt gets sold off– as it will - when the “mkt re-tests its lows” – then I’ll buy them.

  • BIG problem (I mean this is really big) – there is a “85% consensus across the globe” that mkts will re-test their lows & EVERYONE knows that & thus MOST are sitting on their pile of cash waiting for all those bargains to come.

Many stocks have already seen their lows

  • I believe that most of those stocks saw their lows, when we saw in late March 250 to 300 stocks each day, hitting multiple year or record lows.

  • I only ever saw that one other time – at the lows in the GFC.

  • So I find it hard to see markets going all the way back to their lows – I think that ship has sailed.

  • I have another way that I think mkts will trade – one that I saw many many years ago, with a whole lot of similarities as far as “sentiment, fear, cash levels, & distress” goes. I’ll cover that next week - but I think most who read it when I do - will find it quite fascinating (I did & a few I mentioned it too have also found it amazing).. That’s for another time & when you see it - you will not believe it & will (if very long cash) not want 'others' to be aware that this happened once before.

If 2nd wave of infections was to hit - then mkts will re-test lows ...

  • But for now mkts have seen their lows (I can’t see them being “breached”)– BUT there is only one way I believe it could happen – and that will only be if a “second wave” of infections comes.

  • Then you can throw all predictions out the window – it will be bad… very bad ..

  • But that’s a Steven King movie that many of us hope to never see released!!!

Problem is there is just so much cash on the sidelines - all waiting for mkts to go all the way back to March 23 lows ..

  • There are too many out there who are sitting on massive cash balances – every day they are out in the press saying how the market is not reflecting reality & this +23% rally is all going to end in tears & they will be ready to act when it does.

  • I also know that a number of instos who are“not” sitting on massive cash balances but are on more cash than normal - have admitted, that they are worried that they did not deploy enough when mkt was falling.

  • Every day it grinds higher is hurting their performance & thus they too would love to see a pullback.

Would those short have covered - when mkts were smashed ??

  • Also all those who were short & making a fortune 6 weeks ago - what do you think they did?? Covered & went long – or stayed short??

  • Well given most had been ‘short” from mid / late 2019 & had finally been proven correct – I’d would have thought - thatalmost all did not cover but continued to stay short “knowing” that mkts were about to get a lot worse..

  • These guys who were short, had solid fundamental reasons for doing so, they stood by their beliefs & (thanks to two X factors – Coronavirus & Oil collapse) got it spectacularly right.

But what did they do then ???

  • When you are so hard wired in your fundamental analysis about mkts going lower & they not only do it, but drop -30% in a record amount of time – you simply cannot believe that the fall won’t keep going - the time down was too short & no market simply recovers straight back up..

  • But the problem is - mkts didn't go down another -20% but instead have done - what they thought was impossible with so much bad news & talk about ‘depression” numbers.

Instead we have seen rallies off the lows of

  • Dow +30%
  • S&P 500 +29.7%
  • NASDAQ +31.4%
  • ASX 200 +22%

Mkts don't always do what the majority expect ..

  • These rallies makes no sense to them - but that is what mkts do – mkts can often they do the “opposite to what everyone expects.”

  • The“consensus from the majority" - was, 6 weeks ago - as mkts were in free-fall- that you don’t buy the mkt “until we see “peak infections”.

  • How many times did we keep hearing that !!!

  • Ok well here is the dilemma –the ASX 200 has rallied +22% off its lows (rather than going down -55% as many – who saw the GFC movie – expected).

But ...

  • Right now the talk is that we are seeing the “peak” in worldwide infections & in Australia & NZ we are only seeing 5 or 6 a day in new cases a day.

  • So what now – the “consensus scenario has already played out” - in that we have seen the peak – but the big problem for those heavy in cash - is that the mkts are now higher – now lower...

  • Again we have seen (so far) - mkts have already “anticipated” well before the masses & the experts the worst & have already rallied off the lows.

  • Also let’s rewind 6 weeks – as mkt as dropping like a stone & looked dreadful & was down -34% on ASX200 ( & Dow -36%), how many times were you told by someone.

  • Yes its down -33%, but it’s going a lot lower– you don’t buy the mkt until the infections have “peaked” & only then do you buy it.

  • Ok the logic was perfect – the problem is – as I said a 7 weeks ago (as mkts were still falling & the low was still a week away) – when “everyone agrees” that is the ‘safest” & best way to play the selloff – then that rarely plays out so well.

As I also said back then

On the 16th March I made the point …

… this is a huge dilemma for investors

  • do they Buy knowing that all the stimulus measures will eventually help ??

  • Or do they sit back & wait until the all clear siren rings & then buy only after they know it’s safe to go back in ??

  • Problem is that history indicates again & again - that as soon as we think things are under control ,mkts would have already surged way off their lows.

  • When that time comes - and it could come at anytime - from any trigger - we will see after a savage -33% collapse in the mkt, an equally astonishing rally - the mother of all rallies 

Moves in World Markets from 2020 high to low & then the recovery off that low

Source Coppo Report

Chart shows in blue which markets have rallied the MOST off their lows & also (yellow) how far they were down at their low

  • Notice that here in Australia we fell -34% - out recovery off the lows we have bounced +22.6%

Source Coppo Report

How far off the record highs (in 2020) we are the 2nd WORST - despite handling the crisis best!!

Source Coppo Report

  • So even after the big rally (+22.6%) in Australia we are still -25.2% below our Feb record high - only the French was in a worse position ...
  • So when someone says we should be a lot lower - I think -25% is not a bad fall - there is already plenty of "bad news" factored into mkts ..

Get more insights from the insto desk in the Coppo report

This article is an excerpt from The Coppo Report contributed to Livewire by Richard Coppleson, Director - Institutional Sales and Trading, Bell Potter. You can find out more by clicking here.

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Richard Coppleson
Director of Institutional Sales and Trading
Bell Potter

Richard authors “The Coppo Report”, a highly regarded market newsletter. He has over 30 years’ experience in financial markets, beginning his career at Ord Minnett where he worked for 15 years, before moving to Goldman Sachs.

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