"The Longer The Need For Repair"

JC Parets
April 20, 2020

Most of what you'll hear me talk about are things I've learned from other people. In some cases, they were predecessors of mine and in other cases they're buddies and colleagues. It's funny because I try to do a good job of giving credit when I can, where I remember specifically who I learned something from. You guys who have been following me for a long time know that about me. But the truth is that sometimes I simply forget where I learned it. It's just part of my arsenal and I always assumed it was there.

The best part about this is that sometimes, when I'm lucky, I come to realize down the road where I learned certain things. For example, I was in Chicago last year or maybe the year before that, I forget, and had lunch with Jim Bianco. Of course we can't help ourselves but talk markets so we dive into a heavy bond market conversation (I know you must be shocked if you know Jim that he's arguing about rates lol). Anyway, he proceeds to rip through 20-30 charts in what felt like a matter of seconds. It hit me! THAT is why I rip through so many charts when I give my presentations. I got that from watching him give a talk at Bloomberg over a decade ago!

Another time, John Roque was nice enough to invite me to lunch. He's a member of the New York Athletic Club but I got booted out for wearing jeans (Amateur move on my part). But we went around the corner to this great Greek joint, so it was all good. Plus then I got to drink my favorite Assyrtiko from Santorini that I love so much with a branzino. The volcanic soil really brings out that acidity, but I digress. John is a big sports nut. So he makes so many references to sports in his analysis that it hit me. That's why I do that! I was so excited. Because I've stolen a ton of stuff from John over so many years - he's one of the best in the business. I got, "We're not in a reversion to the mean business, we're in a reversion beyond the mean business" from him. I learned from him to analyze the market caps of sectors as a % of total market cap. He was one of the early influences on me to use gold as a denominator when I was in my early 20s. I'm probably missing a bunch, but he's been a tremendous inspiration to me.

The reason I'm telling you all these stories is because sometimes, I truly truly remember where I learned certain lessons, including what we're going to talk about today: "The Bigger the Drop, The Longer The Need For Repair". This is one of the many great lessons I've learned from my friend Louise Yamada. She is one I'm glad I listened to when I was much younger! When I emailed her about this quote wondering if she got this from the great Alan Shaw, she said yes, that she learned it from him and Ralph (Acampora).

When I look at charts like Sadhav Engineering, I can't help but think about this quote. It's almost like it was written for this stock:

Click on chart to enlarge view.

Think that down 84% in 3 months is bad? Well, the stock is also down 95% from its 2018 highs.

Doesn't it remind you of DLF Limited after the financial crisis?

Or Japan, for that matter? In the late 80s, this one park in Tokyo was worth more than all the real estate in the entire state of California combined. I've been to that park. Eh. Skip the park and head straight to the Tsukiji market instead. But needless to say, the Nikkei has been "repairing" for over 3 decades and still needs a double to reach those highs again.

HEG Limited is a great example of this process over the last two decades. During the Financial Crisis, it fell 85% and then went sideways, not making a new high for nearly 10 years. After a 4200% rally into late 2018, the stock has again fallen drastically, down 92%.

My point is that I think this is something to remember when asking, or get asked in my case, about buying these stocks that have gotten crushed. What is it about humans that makes us want to buy the biggest piece of crap we can find, because we think we're smart enough to "know" it's cheap. It's nonsense. It's being sold like this for a reason. No one wants it.

For us, it's really been about buying the strongest stocks in this market and only taking shots in weak stocks for mean reversion where the reward/risk was ridiculously skewed in our favor.

The fact of the matter is there are just not that many strong stocks out there. The number of stocks in the Nifty 500 that are overbought or above their 200-day moving average remains dismal.

With that said, the strongest stocks in the market gained their footing on March 12th, ahead of the Nifty 500 bottoming on March 23rd. We saw the number of stocks making 21-day lows peak on March 12th and fall, despite the index continuing lower. In other words, breadth was improving.

Now we're seeing the opposite as the index marches higher. Fewer stocks are making new 21-day highs. Breadth is weakening.

The average stock in the Nifty 500 is down 42% from its 2018 high and the median stock is down 48% from its 2018 high. As our charts above show, history suggests that we should expect continued volatility in both directions as opposed to a v-shaped recovery.

In this type of environment, we're focused on the strongest and weakest names out there and taking trades on both sides of the tape when the reward/risk becomes favorable enough to warrant doing so (as it is now on the short side).

We're going to discuss many of those trade ideas in our Members-Only Conference Call this Wednesday, at 7:00 pm IST.

If you'd like to join us for that call live or catch the recording, start a 30-day risk-free trial.

See you there!

JC

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