I ordered the code red.
The market is in chaos and more unstable than many think, but most ignore it.
Averages are holding on by a thread. The supercharged Fed pit is about to end.
Stocks are more overvalued relative to “fair market value” than at any time in recent history.
Meanwhile, market participants have been misled into buying low-value speculative gewgaws (read: GameStop (GME), AMC Entertainment (AMC), Canaan Inc. (CAN), Marathon Digital (MARA), Plug Power (PLUG), etc.)
“You can’t handle the truth. Son, we live in a world with walls, and those walls must be guarded by men with guns. Who’s going to do it? You? You, Lieutenant Weinberg? I have a greater responsibility than you can possibly fathom. You cry for Santiago and you curse the Marines. You have that luxury. You have the luxury of not knowing what I know — that Santiago’s death, while tragic, probably saved lives; and my existence, though grotesque and incomprehensible to you, saves lives.””
As always, these are solely my views based on my analysis and observation of the markets. The spread between current market prices and “fair market value” is wider than at any time in recent history, and the downside risk dwarfs the upside reward.
The church of what is happening now has lost its congregation
“Markets are strongest when broad and weakest when confined to a handful of blue-chip names.”
— Bob Farrell
The width has deteriorated significantly and many other technical indicators point to problems in the future. Many talking heads in the corporate media, investment communities (such as redditt, WallStreetBets, and Robinhooders) have sold traders and investors a general estate by pushing and punishing speculative gewgaws (read: SPACs – loaded with unscrupulous fees and questionable acquisition strategies that follow high fees – and additional cryptocurrency games) because they briefly outperformed dramatically.
When I was critical and shorted many of these stocks (some of which are now down 75% in value), I was ridiculed and criticized. A common refrain: “What, Dougie, these stocks are flying up and you obviously don’t want to make money!” Most have swept these crazy transactions under the rug, but what’s really scary is that they still think they’re driving.gh.
Heck, even CEOs like AMC’s Adam Aron have been fooled into sub-optimal capital allocation strategies! In my opinion, he should be fired from his job for selling a bunch of day traders (the daily volume in AMC’s stock is routinely traded near or above the float) and those who supported him should be their big mistake. admit (they won’t).
With their demise, traders and investors (and the entire corporate media community) have moved on to Microsoft and FAANG, arguably pushing those stocks to inflated levels with “small margin of safety.” Even bona fide antitrust issues (from both Republicans and Democrats) and threats are completely dismissed at this point.
The outperformance of these great franchises poses a potential threat to investors in them because if a broader market decline occurs, they will become ATMs and could fall quickly despite the protests of many who have been waiting for them for a long time.
Remember that historically there is a pattern of the be the last to be first. In all likelihood, we will see that pattern develop again, especially if interest rates are above current levels.
The Federal Reserve and our undisciplined political leaders on both sides of the bank have produced a potentially deadly and liquid cocktail that has lifted stocks, fixed income, art, digital currencies and real estate to levels that are unsustainable and vulnerable.
The Fed is now trailing the curve and its hasty adjustment to tighter policy is likely in the offing, taking the market hard at a time when no one expects a major market drop.
The supercharged Fed pit is about to end.
Reread and consider Bob Farrell’s 10 investing rules
Markets tend to return to the mean over time.
Translation: Trends that get overloaded in one direction or another will return to their long-term average. Even during a strong uptrend or strong downtrend, prices often move back (back) to a long-term moving average.
Excess in one direction leads to an opposite excess in the other direction.
Translation: Markets that overshoot at the top will also overshoot at the bottom, sort of like a pendulum. The farther it swings to one side, the farther it bounces back to the other side.
There are no new eras — excesses are never permanent.
Translation: There will be a hot group of stocks every few years, but speculation crazes don’t last forever. In fact, over the past 100 years we have seen speculative bubbles involving several stock groups. Cars, radio and electricity powered the roaring 20s. The nifty-fifty was the driving force behind the bull market in the early 1970s. Biotechs bubbled up every 10 years and in the late 1990s there was the dotcom bubble. “This time it’s different” is perhaps the most dangerous phrase in investing. As Jesse Livermore puts it:
“One lesson I learned early on is that there is nothing new in Wall Street. It can’t be, because speculation is as old as hills. What’s happening in the stock market today has happened before and will happen again. “
Exponentially fast rising or falling markets usually go further than you think, but do not correct by going sideways.
Translation: Although a hot group eventually falls back to the mean, a strong trend can continue for a long time. However, once this trend stops, the correction is usually sharp.
The public buys the most at the top and the least at the bottom.
Translation: The average individual investor is the most optimistic on the market tops and the most bearish on the market bottoms. The American Association of Individual Investors survey is often cited as a barometer of investor sentiment. In theory, an overly bullish sentiment warns of a market top, while an extremely bearish sentiment warns of a market bottom.
Fear and greed are stronger than long-term determination.
Translation: Don’t let emotions cloud your decisions or influence your long-term plan. Plan your trade and trade your plan. Prepare for different scenarios so as not to be surprised by sharp unfavorable price movements. Sharp drops and losses can increase the fear factor and lead to panic decisions in the heat of battle. Likewise, sharp claims and excessive profits can lead to hubris and deviations from the long-term plan. To paraphrase Rudyard Kipling, you’ll be a much better trader or investor if you can keep your head when it’s all about their loss. When emotions run high, take a breather, step back and analyze the situation from a greater distance.
Markets are strongest when broad and weakest when confined to a handful of blue-chip names.
Translation: Width matters. A narrow-width rally indicates limited participation and the probability of failure is above average. The market cannot keep rising with just a few large caps (generals) leading the way. Small and mid-caps (troops) must also be on board to give credibility to the rally. A rally that lifts all boats indicates far-reaching power and increases the likelihood of further gains.
Bear markets have three phases: a sharp decline, a reflexive rebound and an extended fundamental downtrend.
Translation: Bear markets often start with a sharp and rapid decline. After this decline, there is an oversold bounce that represents a portion of that decline. The decline then continues, but at a slower and faster pace as fundamentals deteriorate. The Dow theory suggests that bear markets consist of three downward legs with reflexive rebounds in between.
If all the experts and predictions agree, something else is going to happen.
Translation: This line fits Farrell’s contrarian slant. If all analysts have a buy recommendation for a stock, there is only one way to go (downgrade). Excessively bullish sentiment from newsletter writers and analysts should be seen as a warning sign. Investors should consider buying when stocks are not liked and the news is bad. Conversely, investors should consider selling when stocks are the talk of the town and the news is all good. Such a contrarian investment strategy usually rewards patient investors.
Bull markets are more fun than bear markets.
Translation: Wall Street and Main Street are much more aligned with bull markets than bear markets.
where i am
Wednesday I wrote:
“It’s important to note that while I believe the S&P 500 index is measurably overpriced, I’m still relatively small in exposure, measured in both gross and net terms.
This reflects (1) my respect for the relentless market strength, (2) my attempt to be reactionary rather than anticipatory, and (3) a view that there is a chance at some point that an apex will come.
I currently think the highest probability scenario is that we are in a relatively narrow trading range with a profit taking bias (call it -3% to -5%).
Bull markets die hard.
But given the ongoing chaos in the market, the notable narrowing of leadership and other technical conditions, I am changing my highest probability scenario from a 3% to 5% market decline to a 5% to 10% decline.
“Market vision is always 20/20 when viewed in the rearview mirror.”
— Warren Buffett
As Bob Farrell teaches us, there are no new eras or paradigms and excesses are never permanent.
Throughout history, markets reflect the balance between risk and reward. But it seems we are in this New World faith where there is no risk and the rewards are easy to obtain.
I’m not short enough.
(This comment originally appeared on Real Money Pro on July 15. click here to learn more about this dynamic market intelligence service for active traders and to visit Doug Kass’s . receive Daily Diary and columns of Paul Price, Bret Jensen and others.)