Trading & Investing in the Relief Rally

In my last article, I outlined 3 phases and its clear that we are in the phase 2 relief rally.  In this article, I want to spend a little time on the chart technicals.  These relief rallies often retrace about 50% of the decline which is at $280 for the SPY (S&P 500 ETF).  Additionally, we can easily draw a few overhead resistance lines, essentially all of which are within the black box I've drawn.  

I would expect 2 different paths into this range, ultimately targeting 275.  Either we charge right into that area (as it seems like we have for the past 3 days), or my more preferred case (as depicted with the black arrows), we pause below (where we are today) before breaking out into the box above.

At 275, the market would have sufficiently 

• worked off oversold conditions
• made typical bear market re-tracement
• run up against horizontal resistances lines 
• run up against the downtrend starting back on late February at the market top
• run up against major falling moving averages

In the last article, I also characterized this relief rally to be lead by momentum traders buying, ultimately countered by fundamental sellers.  I'm just going to use Carnival Cruise Lines (CCL) as an example, but there are many to choose from that offer similar characteristics.  These are the companies most impacted by Covid-19 (cruises, airlines) and have rallied the hardest from the bottom.  CCL reversed from $8 to $18 in the past 3 days - a prime example of aggressive momentum traders.  As we approach the top of the relief rally, we should see 

• sellers stop the rally (lack of buyers) in these most beaten down sectors
• a rotation once again into more defensive names (utilities, healthcare, large cap secular growth)
• a rotation into value names - i.e. financials

I believe this is where we are now, observing that utilities and healthcare outperformed today.  The market may also be front running the necessary bond/equity rebalancing at the end of March for Q1.

Personally, I would use this opportunity to sell any remaining positions that are directly affected by Covid-19 to raise cash.  If you're an investor, you shouldn't have any.  And if you're a trader, its time to take profits.

On a pullback, I would be looking to add to still damaged stocks, but names that offer value when looking out 5 years from now.  This includes many of the big tech names, and certain quality blue chip companies.  I would also look at high yielding companies that perhaps have been caught up in the broad market decline that have yet to recover.  These could augment the cashflow portion of a portfolio for many years to come.

In my next article, I will outline my longer term thesis in a "Post Corona World" and specific stocks that should benefit from secular trends.

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Risk Manager Jeff