Has the bear market in U.S. stocks ended? — Mr. Tetsu Emori

【US Stock Trading Strategy】Publication date: 2020/03/27 08:01

US stocks rose sharply. The bottoming momentum is finally starting to appear. With a 10% rally from the bottom, there are already indications that the bear market has ended. However, we should not let our guard down yet. Until the spread of the novel coronavirus is stopped, we should expect continued unstable market developments. In the past, when prices fell more than 30% from their highs, it took on average 1.7 years to confirm the bottom. Excluding the Great Depression, it was about 1.5 years. That said, there have been cases like Black Monday where the bottom was reached in three months. With various scenarios in mind, we should monitor market trends.

BlackRock and Credit Suisse on the 26th said that, as stock markets have recovered this week due to stimulus measures announced by governments and central banks in response to the coronavirus, it is time to return to equity investments. The MSCI World Index has risen 8% this week, and if it continues at this pace, it would be the strongest rise since December 2011. Over the past two days, more than $5 trillion has recovered. As coronavirus infections spread in Europe and the U.S., pinpointing a turning point is not easy, but BlackRock and Credit Suisse have indicated a somewhat bullish stance on risk assets.

The BlackRock Investment Institute noted that 'the unprecedented response demonstrates the decisive policy actions we have been seeking and will pave the way for eventual economic recovery.' It went on to state that 'the stock decline has created significant value for long-term investors' and recommended clients rebalance into risk assets. It also said it preferred the U.S. market due to the scale of the U.S. government's policy response. Additionally, Credit Suisse is positive on emerging market equities, saying, 'It is wiser to start moving earlier rather than wait for the bottom to be clearly in.'

Thus, viewpoints that see this sudden plunge as an investment opportunity are beginning to appear. The stock sell-off this time is clearly driven by the spread of the coronavirus. Indeed prices fell sharply, but the backdrop included excessive leverage-based investing. Also, many companies, while not yet having profits, tried to sustain high stock prices through share buybacks, contributing to the decline. Going forward, earnings are expected to fall due to the coronavirus, but as corporate profitability recovers, there will likely be focus on valuation discounts.

In any case, the most suitable timing for stock investing is to buy when prices are beaten down and cheap. Whether we are at the bottom now will not be known until later. There could also be a double bottom. Nevertheless, buying on dips has its advantages. For long-term investing, focus on physical investments, buy steadily without leverage, and persist in buying on dips. And it is crucial not to stop. I too continue to buy calmly almost every day.

That said, in sharp declines like these, it is wise to combine short-term trading strategies so you can short. The current short-term trading strategies for U.S. stock indices are already long for the Dow, S&P 500, and Nasdaq indices. The rise today has yielded significant profits. However, if prices fall, we will immediately go short. These are strategies analyzed purely on technical indicators. By separating them from fundamentals, judgments can be made mechanically.

If the short-term trading strategy signals a decline, we can hold short positions and hedge long-term cash stock investments. By combining these strategies, we can monetize short-term surges and drops. When the decline ends, we can deploy funds earned from shorts into cash or long positions at low prices. Mastering this method will steadily grow capital. Right now, due to the coronavirus, reading near-term price movements is almost impossible. This sharp decline makes clear only after the fact how serious it was. In such times, it is still important to watch price movements themselves and add shorts through short-term trading strategies.

In terms of a long-term portfolio strategy, we have been buying on dips within the downtrend, and we will continue to do so on further declines. There is still potential for another 20–30% drop, but we intend to keep buying. This is long-term investing, so we do not plan to stop. Assuming prices could fall by up to another 20%, we will reserve funds and continue buying on dips. If investing in the physical market, you can withstand declines. When cash becomes available, you should gradually buy on dips. The point is that buying on dips is favorable if you have the financial cushion. Ultimately, stock prices will recover. In long-term investing, the bottom is when prices fall and you give up and sell. It’s peculiar, but this seems to be common. Now is the time for horizons measured in years.

Basically, holding only a position in the S&P 500 should be sufficient. Broad, diversified investments across assets lead to stable management. The VIX also serves as a hedge, so including it as a trading instrument allows for broader operation. The combination of S&P 500 and VIX is very important.


Dow: Long (short-term overbought)
S&P 500: Long (short-term overbought)
Nasdaq Index: Long (short-term overbought)
Russell 2000: Long (short-term overbought)
VIX: Short (short-term oversold)

＊(Overbought) means taking profits (in long) or adding to short (in short), (Oversold) means covering (short) or adding to long, (Overheated) should be treated as a short-term overbought indicator. It is based on deviation from moving averages.

Written by Hayakawa