Rally Day 1: As predicted, the Market Capitulated on Monday and is Already up 10% from its Lows

So I can’t give advice on when or what to buy. I can just tell you what we’re doing.

We bought the QQQ yesterday at 425 across all our common Stock portfolios.

At 425 a share that is a full 6-7% off of the lows. The reason we bought at $425 is because those portfolios are ultra long-term and I know that 1, 2 or 3 years into the future, those purchases will look genius.

QQQ is likely to be trading at or north of $600 at some point in time in the next few years.

Even if we enter a full bear market, we will still likely see the market at fresh all-time highs in the next few years.

At $425 a share, we’re talking a potential near 50% return. On shares, not options.

Notice that our common stock portfolio target is 20% annual returns. That’s what we try to accomplish on an average year.

So when I’m making purchases for the common stock portfolios, it’s with a multi year time horizon in mind and with our return target in mind.

We’ve outlined what we expect is going to happen and we’ve outlined the technicals as they currently stand.

The further one buys off of the lows, the higher the overall risk. But that needs to be balanced out by an objective look at current prices relative to future expectations.

When looking at the four part framework, our back tested strategy of buying on a 10% correction works.

In chapter 1, we showed that buying the market at a 10% discount from it’s highs, has historically guaranteed a recovery within two years of making a purchase, even if we entered a bear market.

We showed that if one waited to buy at the 10% down mark in 2008, those buyers saw a full recovery by 2010 and they even had gains.

This is true of every major bear market of the last 20+ years

At $432 a share, the QQQ is down double that number. At $432 it is down 20% from its highs.

I haven’t gone back to the financial crisis or 2022 or covid era or any of these other major selloffs to see what would’ve happened, had someone bought at 20% down. But I’m willing to wager performance was very strong.

For example, I know that in 2022, the highs ahead of the bear market was at 408 pre-dividend adjustments.

20% down would have been $81.60 below 408. That would be the same as buying at 326 a share.

So suppose someone bought at 326 a share in early 2022 (Feb-Mar).

They would have went through hell for all of 2022

But come December 2022, the market bottomed and begun a massive rally.

By the time we reached July 2023, the QQQ had rallied to $388 a share.

That means in roughly 18 months from purchase, anyone who bought the QQQ at $326 during the last bear was up 20% overall.

The market then sustained a correction from July 2023 to November 2023.

From there the market then rallied to 450 initially, sustained a correction down to $418 and then rallied to $503 ahead of the August 2024 crash.

So had someone bought at 20% down in early 2022, they would have made a purchase at 326. From there the QQQ rallied to 503 in about 2.5 years. That’s 54% return in 2.5 years in regular shares. .

And then, obviously the high was 540. That’s a 65% total return on common stock. .

So just quick back of the napkin math based on memory, had someone bought at 20% down in the last bear market, they would have been up 65% in exactly 3 years.

That’s on a common stock portfolio

And even with this crash, they’d still be deep in the green. Even with the QQQ falling to 400 they’re still deep in the green from their purchase at $326.

Again that assumes a full ass bear market here. In most cases, we don’t enter a bear market as they’re rare. When the market does drop 20%, we generally rally back to the highs in relative short order (a few months).

Anyway, that should just give some perspective on why we bought at 425 a share. Because even if we have a bear market, that purchase will be solid long-term.

That is also probably true of 2008 in every other similar bear market.

The only bear market that is going to have exceptions is dot-com crash because we were coming off of such extremely high valuations.

That entire dot-com era was driven by FOMO based speculation. Market values were dominated by companies that produced no income at all.

And a while it’s OK in some cases to value companies way above their earnings capacity there needs to be some sort of reason behind it.

Amazon, for example, was valued way way it’s earning capacity because it derived such massive amounts of revenue

Tesla currently trades way north of its earnings capacity because the company innovates. Tesla does a lot of different things and it does it well. Any one of those in innovations can turn Tesla into a Nvidia

For example, it’s work on robotics could easily catapult the company

In the dot-com era, almost everything was valued in a Tesla like way.

And when that happens, it becomes very difficult for the market to crawl back to its previous highs.

But in Covid or in 2008 in 2022 or today, we don’t have extreme valuations. We did see the S&P P/E ratio rise above 30 but that’s still pretty mild. Like that’s not a bubble by any stretch of the imagination. And there are plenty of justifications for higher PE ratios.

For example, Apple traded between a 10 and 18 PE ratio for much of the last decade while it was in hyper growth

But in the 2020s its PE ratio expanded given its ability to drive consistent cash flow flows year after year. The iPhone has become a mainstay of economy. It’s basically automatic.

So even though growth rate has come down dramatically a higher P/E ratio is warranted given the cash flows.

Anyway, the point is this. Buying at 20% down is likely to yield very positive results long-term as the market is likely to rally to 600 or higher in the coming years.

It’s also why we bought the June 2027 $400 calls. Those calls will be worth double on a QQQ rally to 600 to share.