How To Play The W-Shaped Recovery

The S&P 500 has rallied over 17% off its Monday low, which marked its lowest level since 2016. The markets are now on a high following the $2 trillion fiscal stimulus plan that may save the American economy from collapse. I originally wrote that a fiscal stimulus plan would signal the beginning of a V-shaped recovery from this pandemic driven market crash, but I am not so sure anymore.

Timelines Are Crucial

Timelines are the most important ambiguities in the US markets right now. The timeline to seeing a decrease in daily new cases, the timeline for a treatment/vaccine, the timeline for the stimulus plan to take effect, and the timeline for life to go back to normal, are all going to be the most influential market drivers in the weeks to come. As these timelines extend, the deeper into a recession the US economy will go, and the larger the market’s downside potential.

From my perception, the timelines are increasing every day our new case count goes up, and there is a good chance that it will take more than a few months for life to go back to normal. Some think that the novel coronavirus will change society forever. Some believe that it will disappear in the summer like its “viral-cousin” SARS, and others estimate that a vaccine is the only thing that will bring our lives back to normal.

My opinion is that although warmer weather may slow down the pandemic, a vaccine is our best chance at life resuming normality. Unfortunately, vaccines are not anticipated to be available to the broader public for more than a year.

The testing and regulations for this type of universal vaccine take time, and even if we do get a vaccine to this current strain of the virus, it will likely mutate (which it already has), much like the seasonal flu. This sounds terrifying amid this pandemic hysteria, but health professionals have anticipated this.

Moderna (MRNA) is beginning to test its vaccine as we speak and says it will take at least two months to realize the first results. Gilead Sciences (NASDAQ:GILD) (GILD) is working on one of the more promising coronavirus treatments called remdesivir. The company had received exclusive orphan drug rights from the FDA earlier this week, which would have given them proprietary rights to the drug for 7 years. Gilead rescinded this designation after some considerable backlash.

W-Shaped Recovery

I am now predicting a W-shaped recovery. The violent bounce we are experiencing this week is not unusual in times of considerable uncertainty like this, and it happened at a level. The support level that triggered Monday’s bottom was the S&P 500 falling 35% from its February highs, hovering around 2,200.

This level, combined with the impending fiscal stimulus was enough to start the big short squeeze that we had all been waiting for. This fear-driven market crash had bears rushing to get short, and these positions made hundreds of billions over the past month, according to Thompson Reuters. Short sellers were covering their positions this week, starting at the support level I just mentioned.

The S&P 500 is now less than 25% off its all-time highs, and with dismal unemployment figures expected to be released next week, I think we have room to fall. 3.3 million people applied for unemployment this past week, which not only made history but was 5 times the previous record. Despite unemployment being on the higher end of estimates, the market continues its rally on hopes that this will all be very temporary.

What I Am Doing

The markets are on a high from the fiscal stimulus bill, but this will not last forever. As I have been saying in my prior articles, continue to average-down on red days. Today I am holding cash and setting limit orders for my favorite tech stocks. Remember not to go all-in on a red day as there will be more to come. Incremental buying and averaging-down will be your most successful strategy.

My Orders:

Alibaba (NYSE:BABA) (BABA) -> $180

Disney (DIS) -> $90

Splunk (SPLK) -> $110

Microsoft (MSFT) -> $140

Sea Limited (SE) -> $40

Taiwan Semiconductor Manufacturing (TSM) -> $45

McDonald’s (MCD) -> $145

Home Depot (NYSE:HD) (HD) -> $160

JP Morgan Chase (JPM) -> $85

Take Away

Patience is the name of the game during market downturns. Don’t rush into the markets on up days because you fear missing out. Bide your time and make strategic decisions. DO NOT TRADE ON EMOTION. I can not stress that enough.

Good Luck!

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