Skate to where the puck is going to be not where it is now

A famous quote by the great one Wayne Gretzky. This is the kind of thinking you need you apply to the market. Last year at this time there was all this talk about "global synchronized growth". Remember that? What happened if you embraced that and skated to where the puck was? Now this catch phase has been flipped on its head and what we hear now all the time is "global synchronized slowdown".

I read an interesting article about the recent annual World Economic Forum in Davos which brings together a collection business leaders, economists, journalists, ect to discuss major issues and topics that are shaping the global  economic landscape. It's a great way to take the pulse of investment sentiment/expectations and as such, use as a contrary indicator.  The author suggested correctly last year that there was a sense of euphoria which was probably a warning that a cooling off phase was due. In 2016 the author claimed the mood was one of worry as there was a belief the global economy was on the brink of a global recession due to the collapse in oil. This year according to the same author, the mood is downbeat again as worries about economic growth are to use his words, "palpable".  What this tells me is that the wall of worry is back and expectations are sufficiently low for the bull market to resume. What about the bear case? For the bear case to play out, you are going to need to see things unravel very quickly much like what happened in the fall of 2008 - not the same level of economic damage as 2008, but rather one thing after another going bad causing growth the plunge even more sharply. Can this happen? Sure can but that's not a bet I'm willing to make at this time.

You can be assured that the sentiment reflected via Davos is one that the authority figures of the world i.e. policy makers and Fed heads are well aware of and probably share. They have learned from 2008 for better or worse, that doing nothing and just letting the markets "sort things out for themselves" like what happened with Lehman, is not the way and so expect policy responses. I wrote late last year that the more the market goes down in the short term the better it may be in long run as it will send a strong signal to authority figures that something is wrong. It took Powell a slap to the face, a left hook to the jaw and a rear naked choke hold  by Mr. Market for him to eventually get the message and shift his policy stance. You can expect similar responses from other authority figures. China has announced stimulus measures and I expect to see European policy makers act very soon too as Germany looks to be in technical recession right now. The hard core permabears will moan and complain about this being yet another kick of the can wringing their firsts saying "just you wait and see how badly this will end!" but that can has been kicked for decades. You will make no money being dogmatic self righteous.. Ya, maybe one day it will end really badly but when? Probably not until we get to the point of maximum complacency where it becomes common belief that authority figures have found a way to repeal the business cycle. 

A key difference between this slowdown vs 2016 and 2011 is that monetary policy is a lot tighter, relativity speaking and we're obviously closer to the end of the cycle. This makes the risk of the slowdown turning into outright recession higher vs those 2 previous times, but with sentiment sufficiently soured and authority figures now well aware of growth stalling/contracting and taking action, it would appear that the bulls have plenty of "outs" here.

Short term I could see the markets consolidating for a bit but I'll admit this is more guesswork than anything else. If the market works off the overbought condition without too much damage and sentiment stays at least neutral, we should see another leg up....wait and see/ 

My thoughts on the ETF movement

ETFs and passive investing has been all the rage these past few years and it's easy to see why. Stats show that most active fund managers can't beat their benchmark index and so it's better to just buy the index and save on fees as well. Seems like the smart thing to do right? It is, but think about what would happen if everyone just bought the indexes and nothing else. All that money pouring in would  hyper inflate the indexes on a bitcoin-like trajectory. In the short to medium term, fundamentals like p/e ratios and such wouldn't matter, it would all be about fund flows. So long as more money is coming in than is going out,  the indexes could soar to unlimited heights This is not unlike how bitcoin and other bubbles function, but as you know, all bubbles eventually burst and ALWAYS end badly. Obviously, not all the money is pouring into passive investments but there's definitely a big movement towards it in recent years. At what point do you call it a bubble and how do you know when the bubble is close to its peak? Very tough questions to answer because you can't really know for sure until after the fact, but there are symptoms of bubbles to watch for and anytime some investment strategy or sector becomes very popular with the general public you got the makings of a possible bubble.

Bubbles usually begin from sound premises which then get taken too far. The tech bubble that burst in 2000 originated from the sound premise in the mid 90s that the internet was going to revolutionize the world. The problem is that once something becomes embraced by the general public, greed and herd behavior can take things too far and whatever the sound premise was becomes a victim of its own success. I think we are seeing this play out with this movement towards passive investing but again,the key question is at what phase of the bubble are we in? Did the 3 month spike in inflows from November 2017-January 2018 mark the final top or is it just a temporary one? We will only know in hindsight, but my instincts tell me there's a good chance that it was not the final top and what we saw in December was a warning shot across the bow as to what will end up happening once the party is really over. For my hunch to be correct, it will hinge on whether this slowdown in the global economy can end soon and turn back up. If so, the bull market will resume and likely do so with a vengeance leading to what would likely be the final phase which could take 1-2 years to play out. In that final phase we would probably see ETF inflows surge once again with the SPX blowing past 3000. I'm not saying I expect this to happen for sure but rather that that it's a plausible possibility i.e. that the window of opportunity is there.

Try to picture yourself in 1998 when the markets dropped 20% 8 years into a bull market. Just prior to that peak the market was fundamentally very overvalued, more so than what it was at the peak of 2018 with interest rates notably higher back then too. Any reasonable person could have been inclined to believe that the bull market was over but it wasn't. Then just like now, the decline was largely due to global concerns while the US economy was relatively sound. I get that there's plenty of different circumstances now vs 98, but my point is that don't count out a bull market just because of valuations and its duration. Major global downturns which end bull markets like 2000-2002 and 2007-2008 have occurred when the US triggered it, not China, or Europe. It was the US that had the major issues which infected everyone else. Yes, this doesn't have to be a pre-requisite, but you have to be mindful of history and be open minded that this bull market can still be alive. So far as I've mentioned before, there is wall of worry behavior in this rally which supports this notion, but that could change. We'll just have to wait and see. Pick your spots and keep your emotions in check. Don't force trades.. .if you missed the bus another one will eventually come....the market is not going to disappear.

The wall is being built

First it seemed like Powel was reading my blog and now it's Chinese authorities lol! Just after I mentioned to watch for a Chinese stimulus package they announced one and now there's talk that a trade deal with the US is close, both of which helped fuel the rally this week. Perhaps this is why the market has been able to shrug off  bad earnings reports and embrace good ones. That's a nightmare situation for the bears and they've been taking it hard up the ass. Up until the last couple of days the put/call ratio was high throughout all of January. That tells me traders/hedgers have been fighting the the rally rather than embracing it. We saw AAII sentiment go from 1.3 bulls to bears to 1:1 bulls to bears despite the market being higher from last week - another sign of the rally not being embraced. Fund flows have been negative year to date despite the very strong start to the year - yet another sign the market has not been embraced. Now, mind you all of this can change in an instant but so far it suggest this rally has staying power i.e. any weakness would not be substantial.

Here's a chart that shows how margin debt plunged to the degree not last seen since the heart of the 2008 crisis.



This is a medium to long term bullish chart because it shows a significant degree of capitulation at the December low, admittedly notably more so than I had thought. Although November 2008 was not the final bear market low it was close to it and buying at that time would have paid off big time. Does this mean then that we could see a retest of the December lows in the near future? I wouldn't hold my breath. Back in late 2008 early 2009 it was pure economic chaos. We are far from that environment right now.

Bottom line: Wall of worry behavior with the market is back for now but it's always tough to chase after such a relentless move. If the sentiment dynamics don't change much I would expect any pullbacks to be relatively shallow.

What could go right? (revised)

I've been stressing the negatives I see out there lately and so in this post I will elaborate more as to what could go right and the evidence that suggests the December low was indeed a long term bottom.

There have been technical market stats that suggest the December low was a major washout event because the low was characterized by extreme selling following by extreme buying. This type of buying "thrust" is what you often see at a major bottom. Here's a comment from sentimentrader about a week ago:

The McClellan Oscillator has gone from -70 to +70 in less than 2 weeks. This happened 10 other times since 1962. All 10 saw the S&P 500 higher a year later. Its median return was +21.9%.

Stats like the above really makes me question bearish inclinations and rightfully so, but you have to take context into consideration. Questions that need to be asked are: At what point in the economic cycle did each of these 10 occurrences take place? What were monetary conditions like (easy or tight)? Was there any sort of government/fed intervention that accompany these signals? What about the stats pre-1962?" Without any context it isn't wise to blindly put faith in any one technical indicator. In addition, the trading environment of today's market is vastly different relative to the past given the dominance of algo trading and ETFs which can exacerbate volatility and may provide false signals. In January 2001 when the Fed cut rates by 50 bps I read about a statistic that showed when the Fed slashed rates by 50 bps or more, the market was up 12 months later every time except for 1929....that stat now reads "every time except 1929, 2001 and 2007."

I digress...I said that this post was supposed to be what could go right and so here are some positive headlines that could possibly transpire. The US and China reach a trade agreement and more importantly, China announces a stimulus package to boost its economy. The Fed doesn't raise rates at all this year and significantly slows or halts QT. European authorities resume their QE. The recent drop in long term mortgage rates stimulates home buyers and the US housing market recovers. If we see these things happen, it could end the global slowdown that's being going on. Let's also keep in mind that lower energy prices acts as a tax cut globally, although it will be drag on US and CDN energy producers.

Here is an interesting thing I came across. This  "Bear market Checklist" would suggest we did not see enough greed/euphoria to suggest a bull market top is in:

(chart removed due to copyright )

One critique you can make about this checklist is that the indicators used are arbitrary and some should carry more weight than others but despite this, it does suggest the strong possibility that the recent decline in the market could be a late cycle 1987 or 1998 type correction.

The bottom line here for me is that despite some ominous signs, the bear case is not a slam dunk. In the last 3 recessions there was a major sector that blew up which created enough damage to spill over into the general economy. In 1990 it was the savings and loans crisis, in 2000 it was tech bubble bursting, in 2008 it was the MBS/housing collapse. What could be the crisis this time? Could it be the massive amount of corporate debt refinancing that is scheduled to happen during the next 3 years? What if there is no single major crisis and we just simply see the economy roll over because of a multitude of smaller factors? We'll just have to wait and see.

Regarding the current earnings season, analyst expectations have been drastically reduced and in my opinion that's more of bullish sign than a bearish one

(chart removed due to copyright)

I saw this chart posted by someone on twitter who believed it was a bearish omen, but if you look at history you will see that sharp declines like this happened near bottoms or at the very least temporary bottoms like in late 2001 (after 911). Sharply lower expectations are bullish not bearish unless you have reason to believe that the lowered expectations are not low enough and will go lower still. That's not a good risk/reward set up given that the economy is not rolling over in a major way just yet. You can see that earnings revisions only got lower than current levels during the heart of the crisis in the fall 2008. The best time to make a bearish bet is when expectations are high not low.

So, all in all there's enough evidence to suggest that the bull case could be salvaged here and that the wall of worry may be in fact be rebuilding. I 'm still not giving the bulls the benefit of the doubt here but I can't give it to the bears either.   Color me market agnostic once again. As such, I think it would be appropriate to use a more active/tactical approach to the market until the picture becomes clearer.

Call me a flip flop if you will, it would not bother me a bit. You should not be loyal to any one side of the market and be willing to change your mind quickly if warranted. I see so many "gurus" make a call and stubbornly stick by it even when it's clear they are been wrong. It's because of pride and ego. Fuck pride when it comes to the market and check your ego at the door. The market doesn't give a fuck about your pride or what you think it should be "rightfully" doing. So many bears complain about about the Fed and government propping up the markets. That's like complaining about getting body checked in hockey. This is the way it is and instead of complaining, embrace it.  You don't like it? Then don't play.

Wait for premium set ups and don't press positions in either direction when the market becomes overbought/oversold. Let's see how people's expectations evolve as the markets go up and down and act accordingly.

So you wanna be a bear?

If you believe in the bear case you need to be aware of 2 things 1) The market ain't gonna make it easy for you to profit on the downside 2) you risk getting brainwashed by the permabears and miserable SOBs becoming one yourself. These are people who for one reason or another want the world to collapse and are always negative. You will not make money in the long run being a miserable fuck. When the markets are crumbling it's easy to get lured into believing the doom and gloom propaganda thinking that the world is going to end.  Don't be one of these losers.

Getting back to point 1). A bear market can have rallies that last several months. The more oversold the previous decline, the longer then ensuing rally could be. It's arguable that the rebound from last February's low was a bear market rally. Anyone who pressed their bearish bets or shorted the first rally from that low got smoked and no doubt wiped out/capitulated by the time October came around.  Look at how the market traded after it crashed due to 911. Although the market was still in bear mode, it fully recovered from that crash and then some. For the ensuing 6 months after the 911 low, bears got thier nuts crushed.

The market did get quite quite oversold in December and so don't be surprised if this rally lasts longer still after perhaps a pause. As I've stated before, it's very difficult and treacherous for both bulls and bears during a bear market because the headline risk is on both sides. You got weakening fundamentals on one hand and policy responses on the other. And in the early stages of a bear market the fundamental data is not uniformly weak as there will still be some positive data coming out that gives false hope - kind of like getting summer weather in early October. Then there's of course the possibility that December was indeed the bottom and the bull market of 2009 is resuming....we will only know in hindsight. I'm still not giving the bulls the benefit of the doubt here but I'm respectful of the notion that it could have indeed been the bottom because until we start to see weakening leading indicators translate to declining overall corporate earnings, the bear case is by no means assured and should not be fully embraced.  Slower earnings growth would not cut it - there has to be an outright contraction. At the end of the day it's earnings or the lack thereof, that drives the markets. Markets will always attempt to anticipate and front run turning points in earnings trends...sometimes it does so correctly, other times it doesn't!

Given elevated put/call ratios throughout this recent rally including today, it shows that too many bears have faded the rally and are helping to fuel it as they get squeezed and stopped out.  Now that the market is ST overbought I suspect that there will be a pause coming soon and I will be watching to see how people react to it. If markets go sideways for a bit, it may lure enough people back in before springing the trap door again. AAII bull to bear ratio is now at 1.3 to 1 and so the pessimism from Joe Q investor has unwound quite a bit.  If the bull/bear ratio gets closer to 2:1, it would be more indicative of an immanent intermediate term top.

When I get conflicting signals like this I step aside. Wait for that hanging curve ball before swinging. 

Weekend Thoughts

I know I've been posting a lot lately and that's because I'm trying really hard to sort out my thoughts. Let's assume for the moment that we are in a bear market. If that's the case the market is going to be treacherous for both bulls and bears alike. If you look back at the charts of the last 2 big bear markets  you will see them littered with plenty of sharp erratic dead cat bounces along the way down like the slope of a jagged mountain side. When despair becomes acute and bears  pile in, the market tends to stage vicious "hope" rallies often due to some sort of policy response/shift from authorities i.e. the fed or the government. However, it often takes several policy responses before the economy is able to finally turn around and so the hopes eventually turn to despair again.

If we are in the early innings of a big bad bear market, there's a good chance we will get a multi-month rally that retraces a significant amount of the initial first down leg. The rallies from March 2001- May 2001 and March 2008- May 2008 come to mind. Will we see the same thing this time around? If the market analog from 2007-2008 continues we will see the market retest the December lows sometime in about 1-2 months as bad economic news starts to appear. With earnings season to begin shortly that could be the catalyst...we'll soon see. I don't want to hang my hat on this analog though..

In terms of policy responses, we just saw the first one in that the Fed is now open to not raise rates this year and not have its balance sheet reduction on autopilot. If we are indeed in new bear market and on the brink of an economic contraction, this policy response is just the very beginning and we will end up seeing the Fed slashing rates aggressively before it's all over. Seems crazy to think this doesn't it? Look at the 5 year bond yield in the US which is at 2.5%. It is just about same yield as the 30 day T-bill rate which is about 2.4%. The bond market is pricing in that short term rates for the next 5 years on average will not be higher than present levels. If the economy is expected to be so strong, which would imply higher inflation and therefore higher interest rates, you would NOT see the bond market give this signal. Granted, bond market expectations can change but this type of signal is rare and has happened just prior to economic peaks.

I've seen bullish investors state that when the yield curve gets flat/inverted like this, you don't have to worry about it for another 6-12 months if you look at history. Well, I would buy that argument if the yield curve got inverted as the economy and the stock market was humming along nicely as it did in 2006 and the other times it happened.  That didn't happen this time around. The yield curve rapidly flattened  in the last couple of months due to weak global economic data with the stock market already well off its peak. This to me says that the danger is rather immanent and not 6-12 months away.

I know I could be wrong about all of this. What if I jumped the gun and the global economy and US somehow manage to skirt a recession?  I don't have a problem with being wrong but it's all about the probablities and the risk/reward set up. To position yourself for a bullish resolution to this (aside from a ST rally) when you see Fed complacency, ominous signals from the bond market, weak housing  and weakening  PMIs 9 years into an expansion, it is simply not a good risk/reward set up.

Near the January peak last year I mentioned that there were flashes of euphoria and there was complacency.  However it was not to the same degree that I remembered at the peak of 2000, but who's to say that 2000 should be the benchmark and that we have to see that type of giddiness to mark the peak? No 2 cycles are exactly alike and as I mentioned the other day, I believe there was enough bear market sign posts spotted to signal a bear market has arrived.

There has been a few similarities with investor behavior recently compared to that of 2000. In the last couple of years there was a big rush into ETFs similar to the rush of index mutual funds leading to the peak in 2000. Index fund investing has an appeal to it because of the low fees and the stats showing how they beat the majority of actively managed funds. The problem is that once any particular strategy becomes popular it eventually loses its effectiveness and will backfire. The motto of this blog always applies.We saw a big rush to robo advisors and commercials from Questrade bashing the traditional adviser telling people they could retire 30% richer by just investing on their own. This was reminiscent to the discount brokerage commercials in 1999 and 2000 telling people how easy it is to invest on your own and buy stocks. We saw people go crazy over bitcoin whereas in 1999-2000 it was internet stocks.

In terms of the economic climate, today is similar to 2000 - record long expansion, record low unemployment. However at the peak of 2000 there was this talk about the new economy and that the old boom and bust nature of the economy may no longer apply. We certainly didn't see that sort of arrogance but I don't think we necessarily have to in order to mark a top.

Whether I turn out to be right or wrong, one thing's for sure is that this is going to be a very interesting year in the market. If I'm wrong and this is just another 1998 type scare then I would suspect the market will go up over 20% this year.

The slope of hope

Back in December I wrote this:

Powell could have just hiked in December  and said "since the last time I addressed you, we have seen some signs of decelerating growth and a marked decline in short term inflationary pressures.  As such, we are going to be much more flexible with our original plans to hike rates next year and unwind the balance sheet."

In today's discussion with Yellen and Bernanke, Powell has now changed his stance by saying more or less what I said he should have said back in December.  He says now he's listening to the message of the markets and that the Fed will be flexible. That's a much needed first step in the right direction. However in my opinion, the Fed and market watchers in general are still too complacent in the face of what is clear evidence of a slowdown. They believe that despite the stock market dropping 20%, the slowdown in China and strong signals from the bond market indicating that rates are too high, the US will do just fine in 2019.  Having a complacent Fed is not a good thing. Back in mid 2007 when problems first started to surface in the US mortgage market with subprime, Bernanke's response was that this was a small part of the mortgage market which will be contained. We all know how that story played out.

What a change in attitude we're seeing now compared to what we saw from 2009-2012 when the Fed was super accommodating and alert to danger. Any hint of a problem and the Fed was all over it while market watchers/pundits were always quick to call the end of the bull market.

Despite the strong jobs report today, which is a lagging indicator,  we still have negative signals from forward looking indicators especially the bond market along with an ongoing global slowdown which appears to be picking up steam. It's great that the Fed changed its stance and moved towards flexibility which they were painfully slow in doing,  but it would appear that they already made the mistake of tightening too much.  The Fed went from "we are going to tighten 3 times in 2019" to  "we might take our time before tightening any further". The message of the bond market is "you will be cutting rates before you raise them" which shows that the fed is still well behind the curve. History suggests you listen to the bond markets and not the Fed. History suggests that being long term bullish when the 2 year bond yield is at or below the Fed Funds rate is not the right posture to have, 3rd year of the presidential cycle or not. How can anyone truly put faith into such nonsense?  I'm shocked to see how so many so called "professional" money managers have been mentioning this.


We will see how this ends up playing out. I've been around long enough to know that  bear markets have violent rallies which can last anywhere from a day to a few months to destroy bears that have piled in and to clear oversold conditions while luring in sidelined money afraid of missing the bottom. Such rallies are usually sparked by hope, in this case hope that the strong jobs report and this change in the Fed's posture is going to somehow negate the negatives we've been seeing and lead to better times. Pretty weak reason for hope if you ask me.  Bull markets climb a wall worry, bear markets decline on a slope of hope.

Market has Powell in a rear naked choke hold

Apple laid an egg and Manufacturing data showed a sharp drop. As a result, 2 year bonds are now  about 12 basis points BELOW the fed fund rate which hasn't happened since early 2008.  The 10 Year bond is closing in on 2.5%. The message is now loud and clear - the fed needs to cuts rates and do it NOW. The bond market is signaling that there will be a very swift drop in economic activity which is going to catch everyone off guard. Don't expect the jobs report tomorrow to reflect this as jobs are a lagging indicator.

Powell is now caught in a rear naked choke by Mr. Market. He tried to show everyone how tough he was, that he wouldn't be pushed around and now he's fucked. He will be forced tap out soon. I guarantee you this guy is not sleeping well.

Danger in 2019

There's an expression that goes "history doesn't repeat but it can rhyme". Well, there is quite the rhyme I see when comparing how the market looked like in the first few months after the peak in October 2007 vs October 2018. I'm not a fan of market analogs because no 2 time periods are alike but  but damn the similarities are uncanny! It's as close to a reply as I have ever seen with the main difference being that after the peak in October 2007 it took an extra month for the market to drop about 19% vs what happened this time around ...but just look at the significant peaks and troughs as circled...it's crazy scary how similar they are! It should also be noted that the VIX hit a high of about 37 near the January 2008 low whereas it hit about 36 at the December 2018 low, yet another important match!

2007-2008

2018-2019

So, let's have some fun with this analog and see what it predicts in the next couple months. According to the 2008 analog (not shown in the chart above) the market could have a little scoot higher before it will start to rollover and retest the lows which should happen within 1-2 months but I wouldn't put much faith in this analog playing out exactly the same way.  There are however some important fundamental and psychological similarities with 2008 and now.  First off, as I had discussed in a previous post there are significant signposts to indicate that a new bear market started in October. There are some holdouts but in my opinion there's enough to indicate that the bull market could have very well ended. There is currently not the same degree of economic weakness now compared to the start of 2008 but the global economy has indeed rolled over with the US Fed rather oblivious to it and still in tightening mode which in in my opinion is the most critical thing you need to have to kill a bull market.

Given what I see from the forecasts for 2019 by the "experts",  it is generally expected that there will be no recession and therefore the market will have a sizable rebound as valuations are now more reasonable along with this being the 3rd year of a presidential cycle which is historically market positive. That's not the sort of wall of worry type of expectation you would want to see. Granted, Wallstreet strategists typically have a bullish bias but in my opinion, there is too much bravado in the face of the decline we have seen. There are negative folks out there which is to be expected after a 20% drop, but I don't get the same run for cover feeling I got in 2011 when the market dropped 20%. Seems this time around  there are much more people inclined to view this as a buying opportunity rather than a signal to get out. And this time around we have a clueless Fed head in Powell who is pondering how much he should raise rates this year when in 2011 and other times the market dropped 20% and had a bullish resolution to it,  the Fed was on the ball and accommodating.

In February 2008, rates on 2 year treasuries were notably below the fed funds rate - a screaming signal that the Fed had to cut rates immediately which they did end up doing in March of 2008. The yield on 2 yr treasuries is presently at  2.5% which is the same as the Fed Funds rate - it's not a screaming signal but is still a strong signal that rates are too tight. It's suggesting that the Fed won't raise rates for 2 years and that implies a significant slowdown in the economy is coming at the very least. The bond market is telling the Fed it was wrong to tighten in December and that rates need to come down. Unfortunately, it looks like ego will make Powell very slow and reluctant to issue a mea culpa until its too late.

Greed and tight monetary policy. I've been saying for years, that's what kills bull markets. Did we see greed at the peak? We did see it in bitcoin but not in stocks in general, but we did see complacency. Monetary policy is not officially deemed as tight until the yield curve inverts however the curve is very flat and parts of the curve have inverted. As I mentioned with my previous post, because interest rates were so low for so long there will likely be a higher than normal sensitivity to rising rates and that could mean that the classic signs of yield curve inversion may not be needed to signal that monetary policy is too tight. A lot of those who are still bullish on the market are saying "relax, we have nothing to worry about until the yield curve inverts and even then the stock markets doesn't peak for another 6-12 months".  I think this is yet another sign of complacency given the emerging signs of weakness we are seeing in the economy. The consensus for a while has been that a recession won't happen until 2020. Well, how many times do the experts call a recession correctly? I can't recall if this has ever happened! Recessions and major declines by nature catch most people off guard.  "I didn't see this coming!" will tend to be response afterwards.  My guess is that a recession happens either in 2019 or in sometime after 2020. There is enough evidence to suggest that we can indeed get a recession in 2019. Still too soon to say for sure but the evidence is mounting.

Remember what I said about expectations when it comes to making bets and how the herd is often slow footed in acknowledging a change in a trend. In my opinion, expectations for the market is too high given weakening fundamentals and tight monetary policy. The Market can surely bounce further here after that December thumping but until fundamentals and/or the Fed change direction I don't expect rallies to be sustainable in the long term. If the US and China manage to secure a trade deal that should provide a relief rally but I don't think such a rally would be sustainable either.

By the way, Trump just said that the market decline in December was a "glitch". If you are bullish that should make you cringe!

I'm still going to be opened minded about how the market plays out this year but I can no longer give the bulls the benefit of the doubt as I have in the past. I believe you will need to have a trading approach to make money this year with the willingness to play the downside. The best way to play the downside is with put options because your risk is limited whereas if you short stocks the fear of unlimited losses and margin calls can do you in.

It's all about expectations

When it comes to betting on sports or the markets, you can make outsized returns by finding situations when expectations are very low or high when recent evidence suggests it shouldn't be. Often times high or low expectations are justified and so being contrarian for contrarian's sake won't work. Great betting opportunities will present themselves when the crowd is slow footed in reacting to evidence of an emerging trend because it has been so used to the prevailing trend or gets caught up in hype. In such situations you get to make a bet at a very favorable risk/reward ratio. Such situations don't happen very often. You need to be very patient and objective when analyzing the facts. .

Take for instance the bet I made on Liverpool FC to win the Premiere League title this year. Odds makers had given Liverpool only a 1 in 4 chance of this happening. I saw this as a major mispricing for the following reasons: 1) In the last third of the previous season Liverpool were arguably just as good if not better than the crowned Champions Manchester City and even beat them head to head. 2) Liverpool's run of good form late last season allowed them them to make it to the prestigious Champions League Final and only lost because of 2 horrific errors by their goalkeeper. Despite the unfortunate loss, this likely gave Liverpool the confidence to believe that they are one of the best teams in the world. 3)  Prior to the start of the current season they made significant acquisitions (including a top class goalkeeper) and were dominating games in the pre-season. 4) At the start of season start Manchester City's top player Keven De Bruyne was seriously injured and expected to miss 2-3 months.

So, the evidence suggested to me that coming into the season Liverpool were arguably just as good as Manchester City yet odds makers heavily favored Manchester City to win the League title again and only gave Liverpool a 1 in 4 chance to win. This bet was a steal. The market was very slow in appreciating the major turnaround in Liverpool and just how good they are relative to Manchester City because it based expectations on the distant past rather than the recent past and present. With half the season remaining, Liverpool have a commanding lead in the league and it's now theirs to lose.

In my next post I'll discuss what I believe are the expectations of the stock market in 2019.