Market Bottom or Bear Market Trap?

Hope is not an investment strategy,’ says The Rum Rebellion editor Vern Gowdie.

Vern is referring to the rather hopeful surge in most global stock markets this week.

At time of writing the ASX 200 is up 16.3% since its 10:30am intraday low on Monday. Though it’s still down 28.1% from its 20 February peak.

Remember, it takes larger gains to recover from relatively smaller losses. A 30% loss takes about 43% to recoup. A 50% loss takes a full 100% gain to recoup. Hence the vital importance of risk management, like stop losses.

That said, if you jumped into the market on Monday, you’ll be laughing.

Markets have been buoyed by extraordinary efforts from global governments and the world’s leading central banks in their efforts to stem the economic damage from the coronavirus shutdowns.

The US government looks set to pass a US$2 trillion (AU$3.4) trillion emergency stimulus package. That comes atop the US Fed’s AU$6.8 trillion monetary response. Not to mention the Fed cutting interest rates to effectively zero.

The current market rally doesn’t look sustainable

And that’s just from the US. Central banks and governments the world over are desperately working to prop up their economies until the virus threat is addressed. The RBA and Morrison government are no exception.

But despite them firing off the biggest fiscal and monetary guns in history, the current market rally doesn’t look sustainable. By a long shot.

Barring a rapid cure or vaccine for the virus (something to pray for but certainly not count on), we’re likely to see a tremendous spike in unemployment over the coming weeks.

Tenants without jobs won’t be able to pay their rent. Landlords without paying tenants won’t be able to pay their mortgages. And banks not receiving their regular repayments will only continue to function thanks to the largesse of the central banks.

The potential ramifications (second order effects) could fill many pages. We’ll spare you those.

Instead, we’ll leave you with Vern’s response when asked if investors should consider selling the bounce?


PS: While most every stock has come under selling pressure in recent weeks, The Rum Rebellion editor Vern Gowdie lists five stocks he believes you should consider selling immediately. You can find out which ones, and why, in his free special report here.

Bernd Struben is an Editor of The Rum Rebellion. In this capacity, he has access to one of the most intriguing and powerful networks of practical investment insight anywhere in the world.

Bernd has worked on four different continents, and has more than 20 years of professional finance, editorial, and management experience. He holds a degree in economics.

The Rum Rebellion