From Hedgeye, a hedge fund I get emails from.
He has switched from bullish to bearish in the last month or so.
He has been pretty good in the past, so I thought that I would share an excerpt from his email.
It also fits in with my current thinking that the rallies will ultimately fail in the near term.
I currently do not see any of this changing the long term thesis of equity ownership, but it makes it more likely, in my opinion, that we are entering a time period where the market is not going straight up every month with almost no downside volatility. That was stock market nirvana. That does not happen often. It is over for the time being.
More often, the market moves in a more erratic manner with increased volatility to make net progress over time.
We had record non volatility that I discussed at length in January and that I fully expected that to end soon and when it did, we would quickly become very volatile.
I think you will find that we are now very volatile.
That is unfortunately the normal price that you pay for long term 10% type returns. You have to suffer through 10% + pullbacks. It is not a fair trade off on a risk / reward basis, but it is the best thing out there in terms of general asset classes that are reasonable to invest in.
So we are in the 10%+ pullback time period now. I am not sure where the “+” part will end, but hopefully there will be behavioral finance / investor psychology, investor fear indicator to watch and discuss when the time comes. There has been in the past and I fully expect there to be again in the future.
So buckle up and do not get whiplash watching the markets gyrate between fear and greed on a daily basis. Enjoy the cartoons that I send out (because I do) and this too shall pass. But not until there is more financial pain in my opinion.
So what’s going on here? We have two factors that we really care about in macro. One is growth. One is inflation. We care about the rate of change in these two things on a trending basis, so what’s going to drive the market for the next three months or more. The trend is your friend.
If you get growth and inflation accelerating at the same time, we call that Quad 2. That’s what the U.S. economy was in solidly from September through January. Now it’s subtly in Quad 2. When the U.S. economy is solidly in Quad 2 the outcomes are very obvious: Bond yields go up, Financials go up, Energy stocks go up. This outcome nailed the all-time highs. We fortunately got that right.
Quad 3, meanwhile, is very bad for stocks. That’s when U.S. growth is slowing and inflation is accelerating. We actually have a Quad 3 forecast for the third quarter of 2018. We’re currently in the second quarter so maybe Mr. Market is front-running because it’s pretty good at front-running the future.
The big risks we see:
- What happens if GDP growth slows from its cycle peak? We’re currently the low on Wall Street with our estimate for headline GDP in the first quarter of 2018.
- The other big one is profits. What happens if profits slow both absolutely and relative to expectations?
- And the third one is what happens if the market is breaking down in kind? When I look at my risk management signals, there are six markets that are currently signaling bearish trend in my Risk Ranges. What’s happened in the last two weeks is that the Nasdaq and S&P have joined the Shanghai Comp, the Nikkei, the DAX, the Spanish IBEX as signaling bearish trend.
So with those three things potentially happening at the same time in the coming quarters, the bear is staring you straight in the face.
All of these things add up to what we’ve been saying for some time now: Sell the bounce and we’re no longer buying the damn dip.
Brian Sly and Company, Inc.