The month of March (up until the 23rd) was like pushing on a spring, where people and funds were getting cashed out on margin.
We’re still on the spring back. How high this will go is anybody’s guess, but my trading instincts suggest it’s probably a good time to take a few chips off the table, at least temporarily. There will be some ‘rebound’ news that will get injected into the the world that things aren’t as optimistic as projected, that the lockdown will have to last for longer, that secondary infections will come back from people previously confirmed without the virus (when it probably turns out that they were false positive diagnosed to begin with and just caught Covid-19 from somewhere else), etc. There is also the element of sheer greed from participants that want to make the quickest buck.
The rebound down will take the market down 3 or 4%, the people that have loaded up will get frightened and dump, a bunch of people will panic over the revenge of the Coronavirus and that’ll likely be the best time to load up, just when it looks like things are getting awful. The speed that this is all happening, however, is quite remarkable. The market action is happening three times as fast as the 2008-2009 economic crisis.
You’re not going to get anywhere close to the bargain pricing you saw in March but there’s still considerable upside coming as long as you avoid the sectors that are sensitive to the “main street” economy (e.g. I wouldn’t want to be owning a sports franchise).
Continue to pay attention to debt covenants, but note that credit is going to become easier to get as the corporate debt market normalizes (this is what happens when the central banks are buying corporate debt – they’ll clear out the investment grade, which means banks can loan to the BBB, BB and Bs of the world). As long as there aren’t significant maturities coming up in the next 12 months or so, you’ll probably be fine if the debt loads are ‘reasonable’. This crisis will also scare a lot of corporations into de-leveraging or lightening up on leverage – the better capitalized companies will likely clean up better in this environment. Entities that should be trading at low yields (e.g. Rogers Sugar, RSI.DB.E/F) are already at a YTM of 600-650bps while just a few weeks ago they were well into the double digits. Of course, the trashy companies are trading in the teens and above still, but even then the ones that generate reliable cash flows will get back to normal (looking at Chemtrade).
