Better to be lucky than good

It's  been quite a while since my last post. I've been busy with work and still am but I got some time now to do a post. 10 years ago to this very day, April 28th 2014,  Greenstar announced there would be a delay in filling their year end financials and so began the chain of events that led me to where I am now. Greenstar ended up being a fraud and I had made the foolish move of putting pretty much all my eggs in one basket. This loss ended my 6 year stint as a full time private investor. It forced me to find a "real job" in order to support my family.  Having not had a real job for so long, I had to start by taking a job that was well beneath my capabilities. I built my way back up but there were still ups and downs, My 2nd job was a nice upgrade but was still below my potential.Then I got offered a job with a firm that promised me the world but ended up pulling the wool over my eyes and I was basically forced to leave which placed me back to square 1 without a job, but the ironic thing about this was that I had made the connection with the firm I am with now as a result of working with that clown show of a company I left. I could not have landed in a better place. Literally. The people, the opportunities, the location were all I could have hoped for. It started off slowly but now, after 6 years with this firm, I'm in a really good spot - far better than I likely would have been had I never invested in Greenstar  (I ended up recouping my losses in Greenstar by the way, thanks mainly to my big score in Foran mining stock).  I’m now in a position where I can be effectively be a private investor again and have a good "real job" at the same time. It's amazing how in life, a single incident can dramatically shape the course of your entire life. Was I lucky? You bet your ass I was. Yes, I did make the most of  the opportunities but I'm not ashamed to admit that luck was just as big a factor if not bigger. 

Things were already looking good coming into this year but now I've had even more good luck come my way. ..so much so that it's making me fearful that I'm overdue for some bad luck!  I'm also feeling a bit guilty about this luck...let me explain. There was this advisor at our branch who recently had to retire because of long COVID symptoms and so he had to give up his book of clients and decided to transfer them to my partner and I. We  had  a zoom meeting with him to discuss his key clients and we were expecting him to mention something about compensation for him handing over his book of business, but it never came up! He ended the meeting by wishing us all the best and thanking us for handling his clients. It's been 4 weeks since and no follow ups from him mentioning compensation. I know he had a liking to my partner because my partner had helped him with any tech and admin issues. He is a young guy and so perhaps he gave the clients to him as a opportunity to get ahead in his career.  There is now another advisor who had to retire due to illness which apparently has taken a major turn for the worse as she will now be in hospice care. We were given the opportunity to acquire her clients and we were supposed to have a meeting with her to discuss compensation but she has now apparently fallen terminally ill and so this is no longer possible. We will likely either get her clients for free or pay a fire sale price for them. So as you can see, I can't help but feel giddy and guilty at the same time as I have been benefiting from the demise of others.

When I look back at my life, I can see how I was blessed with so much good luck in general. There were moments when I was on the brink of the abyss both from a personal and financial perspective but somehow, someway I would get rescued, often just in the nick of time, like if you're on a highway and you are about to miss getting off at an important exit but you manage to squeeze in at the last second.  It makes me shiver thinking about my good fortune and it makes me paranoid to even share this for the fear of jinxing it, although I don't think anyone even reads this blog! Yes of course, I will give myself some credit for being resilient during tough times and making the best of the opportunities but man, better to be lucky than good as the saying goes. However it would be even better to be lucky AND good.... and I can hope to be so. I will NOT get complacent and take things for granted, but I think I have somewhat of an imposter syndrome which has made me more anxious and less resilient that I used to be. I think part of it also has to do with the fact that I'm at an age now where I can't afford to fuck up again...I don't have the time to make a comeback.  

Ok let's talk markets. In my last post back in early January I said I was expecting some sort of consolidation but if I was going to be wrong it would be that the market simply marches higher relentlessly because of the new all time high effect. Well, I was right about being wrong! When an asset class makes a fresh all time high, especially after not having done so for quite some time, it tends to be be powerful signal leading to further, multiple new highs. That's what happened, but in doing do we got quite overheated from a technical and sentiment perspective much like what happened last summer before that 10% correction. CTAs and other momo trader types were pretty much all in and were even getting away with it for a few weeks, but the market finally cracked after rate cut hopes were once again dashed. Coming into this year there were great hopes for multiple rate cuts to start as early as March. Then they got pushed out to start June and now there's serious concerns that there won't be any rate cuts at all this year. It would seem that the pendulum has swung too far in the opposite direction now.  This latest market decline has CTA puking written all over it. Quite frankly, it's a necessary purging of these jokers and other weak hands who were reluctantly long the market only because momentum underpinned by rate cut hopes. 

The question I ask myself is was the market overheated from a longer term point of view when examining sentiment/positioning? The answer is no. As I said, ST sentiment did indeed get overheated similar to last summer which warrants a correction, but like I also said last summer,  LT sentiment did not reach a bullish extreme which suggests the bull run is not over.  Let's examine some interesting charts I came across which captures sentiment in different ways. 

This charts suggests we have likely hit an intermediate term top at the least, given how prior ones coincided with an upward spike like what we saw. Could it have signaled something more ominous? Perhaps but I don't think so. You can see that over time market peaks have been occurring at progressively higher levels and also, the L/S ratio has risen sharply only after having been in the doldrums for the better part of 2 years and look at how quickly is has declined now after the 5% pullback. 

This recent surge in optimism could suggest a ST/IT top but is not at LT top levels. Like with the previous chart, this burst in optimism is coming after prolonged depressed levels which is what you tend to see in the first half of a bull market advance, not the latter stages. 

 

Margin debt has only recently bottomed out and has had a moderate increase. LT tops have occured after major y-o-y surges as was the case in 2000, 2007 and 2021.

This unique twitter poll  is unconventional measure of sentiment. Sentiment was firmly bearish for better part of 2 years and only recently has switched to the bull camp, but only moderately so. It's still not at bullish extremes found at prior LT tops.    

IPOs have been in the doldrums for 2 years+  which is not what you see near a major market top. Apparently, IPOs are slated to make a comeback in Q2 but even if they do it would take some time before this metric gets overheated.  

Other notable mentions are the BofA bull bear indicator which got as high as 6.8 at the recent market peak and has subsequently dropped back to 5. Prior major market peaks happened when this indicator hit 8 +.  While 6.8 is on the high side, it's not extreme and its coming off a long period where it was at rock bottom lows. AAII sentiment has had multiple weeks of bulls greater than bears but it's coming off a record streak of bears outnumber bulls. Do you see the common theme here with the all the above indicators?  Most of them had a surge in bullishness but it's not extreme and it's coming off of a prolonged period  of deep bearish sentiment. That doesn't scream LT top to me and it's only natural to see bullish sentiment surge like this given that the market has been in a bull market for the past 18 months and has made new all time highs. This bullish surge warrants a correction/consolidation but the evidence suggests we haven't seen bull market killing euphoria yet.   

Chuck your biases and just do the opposite of dumb money

Back in April of last year I wrote this: 

We've been in a rather choppy market for the past 9 months which to me looks like a base.  Bears of course are going to say it looks like a bear flag, but I will say this. If I woke up from a 5 year coma and the first thing I did was look at 5 year chart of the market, I'm pretty sure I would say that it looks like the market is consolidating gains from recent years and is forming a base which will lead to an upside breakout at some point.  That would be an objective viewpoint based solely on market action without any biases or influences from news flow, economists, pundits and what have you. 

I didn't see one single person on twitter or in the entire financial media make an observation along these lines. Instead, all you heard throughout 2023 were complaints about how the market was only being driven by 7 stocks (not entirely true) or warnings about the inverted yield curve, SAHM rule, or what have you. Instead of listening to the market, they resisted it.  I know a lot of people came into 2023 happy to just sit in cash and collect 5%. Ok, great. You made your 5% but you  missed out on 25%. And it wasn;t just the mag 7. There were plenty names in consumer discretionary and elsewhere that did well. European and Japanese stocks also had a great year. Now what will all these folks do if interest rates start getting cut while the market is making new all time highs? At first they will resist because the market is "too high"  but eventually they will do what they always do and find some rationalization to get back into the market.  Rates can't get cut with the market at all time highs you say? Think again. Look at 2019. Look at 1995. Look at the 1980s. Rates cuts aren't necessarily the result of a recession. If  it becomes painfully obvious that inflation has settled down - even in the 3% range rather than the 2% target  - the Fed can't justify keeping rates at 5.5%. Furthermore, if it turns out that 3% becomes the new floor, the Fed may eventually capitulate on their 2% target.  

Getting back to the coma observations; this is not the first time I wrote something like this. I did the same thing in 2011 when the market had a big scare and concluded that using the "waking up from a coma" perspective, it looked like  market may just be having a major pullback after having been so strong during the previous few years.  So, what would my outlook be now if I woke up from a 5 year coma and the first thing I did was look at the chart of the market? I would say that the market trend looks quite strong as it's on the verge of making new all time highs. I would say that based on experience, any asset price that makes a fresh new all time gives a powerful bullish signal which tends to lead to further new all time highs. I would also say though that the market is quite extended above its 200 DMA which leaves it vulnerable to a significant  pullback and/or sideways consolidation phase.. These appear to be 2 conflicting scenarios but not necessarily. It is possible, and likely in my opinion, that we see the latter happen before the former. If we don't get a pullback/consolidation and the market does go on to make all time highs, I suspect it will be a bull trap and not have legs....at least initially. That folks is my unbiased  "waking up from a coma" assessment. If I'm going to be wrong, I will likely be wrong in that the market simply marches higher relentlessly. because the all time high signal is quite powerful.

The market is currently doing what it does best which is frustrating both bull and bears a like by not budging much to the downside despite what appeared to be decent excuses to do so such as hotter than expected CPI. One thing I continue to notice is stubborn put buying. I pointed out in November how this was providing support to the market.  At some point these hedgers/speculators will throw in the towel and perhaps that's when the market will see some meaningful downside.  

I do want to reiterate something I stated in my previous post: Despite the notion of "soft landing", the vast majority of outlooks I have read by strategists and fund managers/are NOT embracing it. You can see it by the price targets, you can hear/read it it in their discussions. This once again sets the stage for the markets to surprise on the upside this year. But unlike last year, we entered this year quite overbought with overextended CTA positioning. The market had been up for rare 9 straight weeks and now that it's stalling you are starting to see people quote ominous stats about how the first 5 days of the year of Jan are negative it bodes ill for the market and if January is negative it's going to likely be a negative year. I for one will not give much consideration to this stat because the market had been so overbought to start it and I say this without having a bias. Quite the opposite actually. I'm taking context into consideration. In January of 2018 the market started off strongly and ended the month up solidly. That would have suggested a great year was in store....we all know how that played out. Again, you had to take context into consideration. Heading into 2018 we had a complacent "global synchronized growth" narrative and signs of froth with weed stocks and BTC going parabolic. 

I am not going to let me guard down, but the odds still favor another positive year based on what I'm seeing from a longer term sentiment perspective. I will show a few more charts next time which shows that the level of speculation/froth still has a ways to go before reaching bull market killing levels.