Following the S&P 500’s outstanding performance in 2019, the continual all-time highs in the first quarter of 2020 were short-lived. Just days after the Dow soared to within 500 points of 30,000, the coronavirus outbreak brought the US equity market down by 30%, precipitating the fastest bear market in history in terms of number of days between the previous all-time high and the bear-market threshold.
Our quantitative model switched from defense to offense during the early stage of the coronavirus sell-off. We have been holding our positions since the entry and remain bullish for the following reasons. The market tends to sell first and think later. This current sell-off has been caused by an enormous amount of fear, reflected in the VIX volatility index, which reached its all-time high closing price of 82.69 on March 16th, topping its high during the financial crisis level. However, the volatility was created by uncertainty, not risk. This often indicates panic sales in the market. Our quantitative analysis suggests this is a technical bear market rather than a fundamental one. A technical bear market is not always followed by a recession, much less a prolonged recession. Additionally, a technical bear market tends to recover relatively quickly if there is positive news following. With the Federal Reserve launching new quantitative easing and the government passing a fiscal stimulus, the market may be set up for a bullish recovery if the coronavirus does not drag on extensively.
Our Market Volatility and Leveraged Market Volatility portfolios are staying fully invested at this moment. Our newly launched Sector Alpha portfolio is holding Information Technology, Health Care, and Financials names. If you have any questions, please feel free to contact me directly.
Leo Chen, Ph.D.
Portfolio Manager & Quantitative Strategist
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