ST caution is warranted

There's some shorter term indicators which are suggesting caution is warranted. NAAIM exposure is at 78. which is close to or at where prior market rallies in recent months have stalled. Fear/greed got as high as 70, and there's some other indicators which are suggesting the market could be running on fumes in the ST, but I wouldn't rule out a quick pop higher before finally peaking in the ST. However, medium/LT sentiment indicators are far from suggesting that the market is too bullish, quite the contrary. When the market is vulnerable to a pullback, pretty much any excuse will do. We have big tech earnings this week. We could possible  see a sell-off sparked by disappointing results and/or guidance or perhaps even none of the above - a sell on the news reaction could end up being be the narrative....like I said, any excuse will do. 

It should be noted that when the market is in full bull mode and we get one of those strong, relentless rallies, these ST indicators I mentioned will get even more elevated and stay elevated for some time without the market pulling back meaningfully. That's because in bull markets, high optimism/bullishness is natural and therefore can be tolerated whereas in bear markets or sideways markets it is not. So, unless the market is ready to break out in a major way (which I don't think it is), the ST bullish sentiment we're seeing now should serve to indicate a ST peak is immanent. So, what would be the catalyst that makes the market break out in a major way? I would say once there is enough evidence to confirm that interest rates have peaked AND that any downturn would be mild enough for the market to look past the valley on to better times next year. If that's going to be the case, I would think that it happens in late May- first half of June. Obviously, this is largely guesswork and as usual I will defer to the indictors.

Switching gears now, I want to talk a bit about perspectives. The majority of the commentaries/analysis of others that I come across have clear biases. People with bearishly inclined biases will present mainly bearish evidence while those with bullish biases will focus on the bullish evidence. It's difficult to find analysis that is objective. Now, this is not to say you should always be 50% bull, 50% bear. You have to pick a side - the side that's going to win and that requires taking both points of view into consideration and the willingness to switch sides when required. You also need to be aware of which indicators actually work in providing predictive power and whether too many people are using it, hence the risk of it losing its effectiveness as it will be priced in already. I've noticed some people pointing out a rise in bankruptcies and tightening lending standards suggesting this is going to be bad for the market, but if you look at history it shows that this may not necessarily be the case as such indictors tend to be lagging or co-incident. For instance after the GFC bankruptcies in the US didn't peak until Jan 2010, yet the market bottomed in March 2009. 

One thing I have noticed over the years is that when someone get burned, typically during big bear markets, they can easily become embittered and overly cynical for a long time and perhaps forever.  It leads them to seek out doomer propaganda and it essentially brainwashes them. This no doubt results in either further losses by playing the short side on market recoveries or in being overly cautious sitting in cash. Since 2000 we''ve had 2, 50%  bear markets, one 35% bear market and 3, 20-25% bear markets and so I can get why one can get jaded, but if you look at those who made the most money through thick and thin, it was the optimists - those who focused on identifying longer term themes/tends, focusing on what could go right.  Take Apple for instance. If back in January 2008 if you were convinced that smart phones would be a mega trend for the next 10+ years and bought shares of Apple, you would have been down about 60%  in the subsequent 12 months but if you remained steadfast in your conviction and held, you would up about 60 X today.  Yes, I know hindsight is 20/20 but to be a successful  investor I believe you should have a certain disposition and if you typically find yourself to be a doomer, I doubt you will be successful or if you have some success,  leave lots of money on the table.  I'm sure there are exceptions to this. I'm sure there are some people who have had success with ST trading focusing on the short side but that's the very small minority. Guys like Schiff, Roubini, Rosenburg,  did you ever see them provide information about their LT performance? No, because it's horrific. All they can do is peddle doom. Even if these doomers get it right this time and the end of the world is nigh, it does not make up for their horrific calls and performance up until now. 

 

End of first quarter comments

As usual, some sort of crisis happens anytime I'm on holiday in March which prevents me from truly relaxing.  I mentioned in early January that expectations this year were very low which had bullish implications for 2023. I also mentioned this:

Coming into the year, the following was the consensus thinking. 

• Bad first half, good second half with lower low in market
• value over growth
• underweight tech
• higher for longer
• recession evident before end of year
• flat to modest gain in the market

As per usual, the market has foiled the consensus so far. What's the motto of this blog again? The growth over value trade may be overheating now in the ST but there's still plenty of doubters out there. The acute underweight of tech stocks I had mentioned in early January is probably not as acute but we're far from the "pros"" being overweight tech from what I can gather. It will be interesting to see the latest positioning stats of money managers. 

The banking crisis in March was quite short lived as the Fed heads in the US and Europe stepped in aggressively. This is what the Feds are best at - providing emergency liquidity to prevent a contagion. 

What the Feds are not good at is managing or forecasting the economy as it pertains to monetary policy. Credit spreads barely budged during the banking crisis and the equity markets recovered all the losses and then some. That should be making bears shit their pants, but rather what I see from them is more hand wringing and snark. Instead of capitulation, they are digging in their heels. Comments I hear from them are "This is just the beginning of an even bigger banking crisis down the road". There's been no recession in Q1 as many were expecting but again, instead of capitulation and admission of being wrong, economists and bears are digging in their heels by simply moving their recession calls to June. With this banking crisis, we are surely to get a recession now they claim, because banks will be more focused on shoring up their balances sheets rather than lending. Maybe, We'll just have to see about that. All I can say is that this banking crisis just serves to lower already low expectations even lower. 

I try my best to be a pragmatist. I adhere to the motto of this blog because it works, it's a money maker.  One of my favorite things to do is to figure out what the average person's view of the market is going forward and then fading that view if it's showing an extreme and especially when it's contrary to what market action has been. Why is it that the motto of this blog works so well? It's because the market is a reflection of everyone's expectations and so chances are if there's a widely held concern or belief about something it's already being reflected in prices. There's a bit of an art to this because sometimes it takes a while for the herd to fully express such views as they may have been anchored to an opposing one for such a long time. The higher for longer narrative is a good example of something that probably took several months for the majority to embrace. In the first few months of 2022 a lot of people were shell- shocked by the abrupt change in the interest rate environment as we were in an ultra low rate environment for several years, but by the fall pretty much everyone had adjusted their view and accepted the notion that high interest rates are hear to stay which is why hawkish Fed comments have been losing their bite in recent months. Sure, you  still get knee-jerk reactions but Fed hawkishness is like beating a dead horse - it's old news unless the Fed funds rate would be poised to go to 7%.. What moves the needle in financial markets are surprises. What would be the biggest surprise this year? Cleary it would be if we don't get a recession or even if we do, a mild one would still be considered a surprise. To move the needle on the downside I suspect we would need to get a severe recession. 

I mentioned in January there were very low expectations coming into 2023. With the market up a solid 8% at end of Q1 has this view changed? It doesn't appear so according to This recent CNBC poll which took forecasts from over 400 so called "pros".  Only 16% believe we are beginning to rally, 16% believe we are close to a bottom and 68% expect more room to fall (in other words expect new lows).  So, despite the market being up notably for the past 3, 6 and 9 months there's very few believers of this market. It's still a bear market according to most.  Probably the number one thing that is keeping people bearish is the inverted yield curve which has everyone bracing for a recession. "The Fed will raise rates until something brakes" is a common bear mantra.  In 2008 the mortgage market broke in the US because there was a lot of bad lending and significant ARMS exposure. Less likely to happen this time around given that 99% of US mortgage borrowers have locked in rates at much lower levels and have 15-30 year terms. Corporations have also locked in low rates as well. You can argue that the small banks "broke" with the recent crisis but the Feds fixed this instantly by allowing banks to effectively cash in their underwater bonds at book value.  But there will be other shoes to drop as a result of this the bears say. Lending will surely contract. Maybe, we'll see. But what if inflation pressures continue to fall and the economy slows down but doesn't crash which then gives the Fed cover to adjust rates lower? People seem to believe that the only way inflation pressures are going to drop significantly is if we get a recession. What if that's simply not true? 5 year break even inflation rates have been averaging about 2.5% since July and have been gradually on the decline for 1 year as inflation pressures have been NATURALY abating despite the fact that consumer spending has not let up at all since then. 

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.