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Marc Cuniberti: Ongoing correction rotations

Marc Cuniberti
Columnist
Marc Cuniberti

With COVID-19 cases on the rise, the stock market is beginning to convulse again. Since March of this year when the coronavirus first made headline news, the stock market’s violent ups and downs have been giving investors fits and confusing market experts.

From a February all time Dow high of 29,568 to a 20% bear market correction of 18,213 in record time, it then catapulted back up within a few thousand points of the all-time high once again in the following months.

Although the early March rout was almost absolute in its destructive scope, taking down almost every stock with it, the rebound which began a mere three weeks later encompassed only a small percentage of securities. This sector rotation, of which I wrote about a few weeks back, has been classically illustrated in the market’s recovery.

I can’t recall a time in recent memory that such pronounced movements of stock sectors rotated back and forth such as what we’ve witnessed in recent weeks.

If COVID-19 infections indeed resurge to even more explosive type numbers, the markets once again could reflect that reality by heading south in a very big way.

The recovery which began on March 23 saw only a handful of stocks begin their steep ascent. Those companies represented the things and services people would use while sequestering in their homes due to the shutdown. Once this group had reached dot.com like enthusiasm, traders began their hunt into other sectors that were in any way, shape or form related to the stay and work at home stocks.

Once those stocks were also exhausted by reaching lofty valuations, the buyers took on the most beaten down sectors. The worst of the worst like cruise ship companies, hotels, dine in restaurants and the motel/hotel sectors had gobs of money tossed onto their gambling tables in a search for fast profits.

Trading resembled the last bastion of hope and enthusiasm coupled with the overabundant greed of the star struck day trader. In other words, the gambling DNA of the amateur and the hopeful trader went diving in the COVID-19 stock dumpster looking for fast and furious gains in the sectors most obliterated by the coronavirus event. One could liken it to the same mindset of those buying penny stocks looking for explosive riches in the shortest amount of time.

With the possible resurgence of COVID-19, reality may be finally sobering up investors. Perhaps the ships wont sail and the planes won’t fly as quickly and as profitably as was thought.

Many states are slowing their reopening processes with some outright halting it altogether.

The realization that we could be in for a second round of COVID-19, with wave two not expected to hit until the fall with the cooler weather, the ugly math may be showing some depressing results.

With some of the stimulus programs ending soon and any new ones being held up in Congress due to political infighting, investors may be waking up to the fact this thing is indeed really, really ugly and the multitude of problems are not going to magically disappear into a happy go lucky, dancing in the streets recovery any time soon.

In fact, an historical recession or depression may be materializing even if COVID-19 doesn’t spike. And if it does and another shutdown is required, things could get even uglier. Like off the charts ugly.

As a result, last week more stock rotation took place and looks to continue. The latest round of rotation appears to be a repeat of the mid-March action, bidding up both the stay-at-home sectors and defensive areas like consumer staples.

Investors seem to be selling the opening-up fad stocks like those ships and planes again while piling back into the conduits of the internet and essential products.

With the markets stunning recovery, investors who were bleeding red from the initial sell off rejoiced in seeing the red fade to grey heading toward a hopeful full portfolio recovery.

Now with the threat of more COVID-19, investors are looking fearfully in the rear view mirror dreading the possibility of a second correction. Not a sector rotation of stock sectors mind you, but an all-out, take-no-prisoners type of wipe out similar to the one that took them by surprise in early March.

If COVID-19 infections indeed resurge to even more explosive type numbers, the markets once again could reflect that reality by heading south in a very big way.

Marc Cuniberti is an Investment Advisor Representative through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Marc can be contacted at SMC Wealth Management, 164 Maple St #1, Auburn, 530-559-1214. SMC and Cambridge are not affiliated. His website is http://www.moneymanagement radio.com.


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