It's becoming quite clear that the market is going to face a huge test this year. Bearish forces are clearly gathering. We know that from history, anytime we get a big flare up in inflation, at the very least it creates a multi-month period of market turbulence as the Fed raises rates and in often cases, it precedes a recession and bear market. January was a terrible month and in the heart of that decline I felt an anxiety that I haven't felt in very long time. I wasn't able to sleep well for a week. For clients that I knew would be especially vulnerable to a market crash I moved them to a safer allocation right at the bottom on Jan 24. Brutal timing, but I had a line in the sand that was crossed and I had to do it. Although there was some signs of extreme pessimism, there wasn't enough for me to delay pulling the trigger. I felt the risk of another December 2018 type meltdown was there and still is. Powel and the Fed not budging at all with their hawkish stance with oil and bond yields pilling on the pressure. The lack of fund outflows is what's missing to signal the type of capitulation I want to see. We are seeing them now but they are modest relative the damage the recent big inflows that preceded them. Perhaps there will be selling into strength which did in fact occur last week as the market rebounded. Also, margin debt appears to be unwinding. The stats are always delayed and so we will have to wait to see the end of January figure. Although AAII sentiment is in bearish extreme terrority, if you look as their actual positioning it has barely budged from the 70% equity exposure which is historically high. I just saw a chart of extreme buying of leveraged bear ETF which co-incided with prior lows. So, all in all, there is enough to suggest that a ST low could be in.
We got pretty decent bounce since the low on Jan 25 but bond yields and oil prices keep creeping higher and until those 2 back off, it's going to at the very least keep a lid on the upside and at worst, put continued downward pressure on the market. Bearish sentiment as per AAII is hitting extremes and put/call ratios are high but NAAIM and fund flows are only showing mild-moderate pessimism given the damage that was done. Earnings seasons was a mindfield. Microsoft, Apple, Google and AZMN were good but Netflix and Facebook not and the later 2 got hammered. The first 4 are the true tech leaders of the FANGMAN complex and so it was critical that they did not disappoint or the market would have been smashed. Maybe they end up disappointing later this year.
Tech sector has been woefully underperforming the broad market and value stocks, energy in particular, have been safe havens. Are we repeating the 2000 tech crash aftermath where value takes charge for the next several years? There is clearly evidence to suggest this can be the case but there's also serious flies in the ointment. In the short term there is enough evidence to suggest the tech sector's relative underperformance is at an extreme and that chasing energy is late to the party behavior. The Russia situation is clearly keeping a bid under energy. If this situation can get resolved peacefully there should be a relief rally in the market followed by a shart retreat in oil and bond yields. I'm not going to hold my breath though. Putting yourself in the shoes of Russia, it would be foolish for them to start a war as it would be them against the world.
Getting back to the tech bubble analog of 2000 where value then took over for years. There's no shortage of people on twitter pointing this out. The bears have been squealing with delight during this decline as if they have claimed some sort of major victory. These miserable fucks have been decimated by the bull market for years on end and so they can claim zero victory even if we are indeed at the start of a new bear market. By the way, the talk that we are starting a new bear market is already out there, yet the market has dropped only about 10% from it's all time high at its lowest point.
The major problem I have with the tech bubble analog is that back in 2000 EVERYONE was euphoric about tech and valuations were higher. Aside from the fringe unicorn plays, broad based euphoria was missing. The leaders of the NASDAQ in 2000 were tied to the telecom cap ex boom related to the building out of the internet. This time around, the big tech leaders are not nearly as tied to each other and the valuations, although high are not nearly as nosebleed as the tech titans of 2000. On the value side back in 2000 energy had been a depressed sector for many years right at the time when China was on the cusp of a decade long boom where they were buying up commodities like crazy.. That's not going to be the case this time. Although the energy sector was depressed since 2015 and rightfully deserved to have a big rebound because of underinvestment, it doesn't appear to have the massive runway like it did at the start of 2000 and has to deal with electric vehicle sales eating away at demand.
The bottom line is that the market will at best, face a multi-month period of consolation as it adjusts to the Fed tightening cycle and stimulus withdrawal. But there's no denying that something worse can indeed play out. Housing is another wild card. If home prices do more than just correct from these lofty levels, it could be the deciding factor that tips the economy into recession as most recessions tend to be housing led. There's clearly a lot that can go wrong this year and as such it's best to be tactical. If it is indeed a new bear market, then we are in early days and there should be a least one major rally to sell into which could perhaps begin from a lower low. A peaceful diffusion of the Russia situation would be a great catalyst. It's really a tough call and dangerous on either side of the market, but the market is definitely starved for some good news on the macro front with respect to yields and oil pressures in particular.
I'm still feeling anxious and nauseated when I think about the market and so that in itself should be indicator to buy.
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