Are there too many “bears” looking for a correction?
When it comes to financial markets, there is one truism as noted in Bob Farrell’s famous investment rules:
“When all experts agree, something else tends to happen.”
Such makes perfect sense given that the “market” is a reflection of the psychology of “buyers” and “sellers.” Such is why sentiment plays such an important role in market expectations.
As an example, a recent Deutsche Bank survey found that 58% of the 550 global market professionals surveyed expect a 5-10% correction by year-end.
Of those managers, only 14% saw the index higher than it is currently, in the next 3-months.
There are many good reasons for concern beyond just a very extended period without a meaningful correction. Currently, the market has gone 319-days without a correction to the 200-dma.
A Wall Of Worry
As the Deutsche Bank strategists also noted:
“Are too many expecting it [a correction] will happen?”
Historically speaking, markets tend to climb a “wall of worry.” But, as noted above, when many Wall Street analysts expect something to happen, it is often profitable to bet in the opposite direction.
Over the last year, in particular, the market ignored concerns over valuations, the impact of the “Delta” variant, inflationary pressures, slowing economic growth, and numerous geopolitical events. Instead, as noted in “Investors Hold Record Allocations,” individuals have ramped up exposure to risk betting on the continuation of the Fed’s ongoing monetary interventions.
It is not surprising that equity ownership is at record highs and highly correlated to valuations. Such is the representation of rising prices on investor psychology. As a result, investors continue to chase overvalued equities until the eventual mean-reverting event occurs.
Such is also the very essence of the meaning of “climbing a wall of worry.” Despite the fact investors “know” they are overpaying for stocks, the “Fear Of Missing Out” leads to the dismal of concerns as “greed’ overtakes “logic.”
Currently, this is the phase of the cycle we are in now, and the desire to “buy the dip” outweighs concerns of a more significant correction.
As noted this past weekend, it is certainly possible the market can continue its low volatility advance for a while longer. However, historically speaking, low volatility has always led to higher volatility. The table below (courtesy of TheMarketEar,) shows the maximum drawdown in any given year. Note that years of minimal drawdowns always get followed by years of larger ones.
In other words, while there may be “too many bears” currently, it doesn’t mean they will be wrong.
The question is, when will the markets start paying attention to the risk?
Heed Thy Warnings
“To differentiate temporary slowdowns from real problems, we look for significant macro deterioration. The Macro Index Model combines 11-diverse indicators to determine the state of the U.S. economy. Investors should be bullish when the index is above 0.7 and bearish when below.
Once the final reports were in for August, the model plunged below 46%, the 2nd-lowest reading of the past decade.“
At the same time, Sentiment Trader noted their Bear Market Probability Indicator also jumped. This model has 5-inputs, namely the unemployment rate, ISM Manufacturing index, yield curve, inflation, and valuations.
“The higher the score, the higher the probability of a bear market in the months ahead. Last May, the model was in the bottom 10% of all months since 1950. This month, it jumped into the top 10% of all months.“
The combination of these two measures should not be overlooked. To wit:
“The chart below shows the spread between the Bear Market Probability and Macro Index models. The higher the spread, the higher the probability of a bear market. The chart shows that the S&P 500’s annualized return is a horrid -17.6% when the spread is above 20% like it is now.”
She, like us, has suggested raising cash levels, adding non-correlated assets, and reducing overall risk, stating:
“The strength of major U.S. equity indexes during August and the first few days of September, pushing to yet more daily and consecutive new highs in the face of concerning developments, is no longer constructive in the spirit of ‘climbing a wall of worry.’”
Being A Contrarian
There is a not so insignificant risk this market will shake off short-term concerns for the time being. Thus, a “buy the dip” opportunity could well be in the offing in the next few days. Such has repeatedly been the case since last November.
However, at some point, the markets will violate this upward trend and complete a retest of the 200-dma.
It is one of the few things of market dynamics that is virtually a guarantee. What will cause it, or when it will happen, is always unknown.
It is times like these I find it helpful to remind myself of something Howard Marks once wrote:
“Resisting – and thereby achieving success as a contrarian – isn’t easy. Things combine to make it difficult; including natural herd tendencies and the pain imposed by being out of step, since momentum invariably makes pro-cyclical actions look correct for a while. (That’s why it’s essential to remember that ‘being too far ahead of your time is indistinguishable from being wrong.’
Given the uncertain nature of the future, and thus the difficulty of being confident your position is the right one – especially as price moves against you – it’s challenging to be a lonely contrarian.”
Moving against the “herd” is where investors generate the most profits in the long term. But, unfortunately, the difficulty for most individuals is knowing when to “bet” against those who are being “stupid.”
Portfolio Actions To Take Just In Case
As noted above, there is a reasonable possibility the market could bounce as “Pavlovian investors” once again “buy the dip.” However, there is also a possible risk of a correction between 5% and 10%.
Unfortunately, I don’t know which it will be until we start seeing definite signs of the market breaking down. At that point, it will be too late to make adjustments. Such is why, as we have stated previously, this is an opportune time to get in front of risk by taking some simplistic actions.
Tighten up stop-loss levels to current support levels for each position.
Hedge portfolios against major market declines. (Cash, Non-correlated Assets, Direct Hedges)
Take profits in positions that have been big winners
Sell laggards and losers
Raise cash and rebalance portfolios to target weightings.
These actions will not protect you entirely from a decline. They will, however, lessen the blow and allow you to rebalance risk accordingly where the time comes.
Or, you can do nothing and hope for the best.
US Meat Prices To Remain Elevated Amid Depleted Reserves
US Meat Prices To Remain Elevated Amid Depleted Reserves
Beef, pork, and chicken in US cold storage warehouses have yet to recover from pandemic…
Beef, pork, and chicken in US cold storage warehouses have yet to recover from pandemic lows and could continue to support higher prices.
New United States Department of Agriculture (USDA) data shows beef reserves dropped 7.7% from a year ago in August, poultry supplies fell 20%, and pork plunged 44% to their lowest levels since 2017, according to Bloomberg.
Jim Sullivan, commercial director for Stable USA, said low meat inventories would suggest meat prices will stay elevated.
"Prices remain very elevated compared to seasonal expectations," Sullivan said.
Soaring supermarket prices have been on the radar of the Biden administration as working-poor families allocate a high percentage of their incomes to basic and essential items. Higher food inflation eats away their wages and is why Biden recently increased SNAP benefits by a quarter.
Earlier this month, the Biden administration finally addressed inflation as a concern but didn't blame the trillions of dollars in fiscal and monetary policies and labor shortages on increased food inflation but instead placed responsibility on meatpackers.
White House National Economic Council Director Brian Deese said "pandemic profiteering" food companies are driving up supermarket costs for Americans. This is nothing more than a blame game and failed government policies that have not just increased food prices but have left supply chains reeling due to stimulus checks that disincentivized workers from working.
New data of low meat supply at US cold storage facility is more bad news for the Biden administration, who will have to develop a new narrative about why meat prices aren't going down. If food inflation remains elevated into early next year, Americans might vote with their wallets during next year's midterms.
Where Do Monetarists Think the PCE Price Level Is Going To?
From an email from Tim Congdon, at the International Institute for Monetary Research (9/20): I suggest that a more plausible figure for end-year PCE annual…
From an email from Tim Congdon, at the International Institute for Monetary Research (9/20):
I suggest that a more plausible figure for end-year PCE annual inflation is between 5½% and 6%. (The consumer price index – up by 4.5% in the first seven months of 2021 – may finish the year with a rise somewhere in the 6½% – 7½% area.)
The conclusion is based on the following reasoning:
In the background here is the huge overhang of excess money balances. In the year to mid-May 2021 the M3 measure of broad money increased by 35%. The evidence over many decades is that – in the medium term – the growth rates of money, broadly-defined, and nominal gross domestic product are similar. So – unless that 35% number is now followed by a big contraction in the quantity of money – the US economy will continue to be affected by two conditions, specifically,
• ‘too much money chasing too few assets’, and
• ‘too much money chasing too few goods and services’.
Of course the two conditions are interrelated and also interact with each other. Our research emphasized last year that rapid money growth was likely to boost asset prices first, and that has been right. (Incidentally, to attribute the behaviour of the prices of US tech stocks to bottlenecks and supply shortages would be daft. Does one have to say these things?)
What’s the implied path of the PCE deflator, relative to nowcasts and forecasts? See Figure 1, where I’ve used the mid-point of Congdon’s forecast (5.75% December y/y), shown as the red square.
Figure 1: Personal Consumption Expenditure deflator (black), Congdon midpoint forecast (red square), Cleveland Fed nowcast as of 9/23 (sky blue +), Survey of Professional Forecasters August median forecast (green line), FOMC 9/22 projections (blue square). Source: BEA, Cleveland Fed, Philadelphia Fed/SPF, Federal Reserve, and author’s calculations.
The FOMC median forecast is surprisingly similar to the Survey of Professional Forecasters’ median forecast from the preceding month (mid-August). The FOMC members then still perceive a deceleration in inflation in the last half of 2021.
Congdon’s forecast looks plausible given the August PCE deflator nowcast (and even more using the September). However, it’s far outside of the range projected by the FOMC, as shown in Figure 2, which includes the high/low inflation forecasts.
Figure 2: Personal Consumption Expenditure deflator (black), Congdon midpoint forecast (red square), Cleveland Fed nowcast as of 9/23 (sky blue +), FOMC 9/22 projections (blue square), high and low forecasts (dark blue +). Source: BEA, Cleveland Fed, Federal Reserve, and author’s calculations.
In other words, the monetarist view (if I can use Congdon’s view as a proxy) differs from both a mixed bag of mainly mainstream economists (proxied by the Survey of Professional Forecasters) and policymakers (the FOMC).inflation monetary reserve fed
US stocks march on, lifted by business optimism
Benchmark US indices closed higher for the second consecutive day on Thursday September 23 lifted by positive sentiments from Fed s economic outlook…
Benchmark US indices closed higher for the second consecutive day on Thursday, September 23, lifted by positive sentiments from Fed’s economic outlook.
The S&P 500 was up 1.21% to 4,448.98. The Dow Jones rose 1.48% to 34,764.82. The NASDAQ Composite rose 1.04% to 15,052.24, and the small-cap Russell 2000 was up 1.82% to 2,259.04.
Traders ignored the weak unemployment data released by the Labor Department on Thursday, which showed new jobless benefits claims rose by 16,000 to 351,000 in the week ended Sep 18.
Economists consider the rise in benefits claims to be because of Hurricane Ida and forest fires and not due to flawed policy action. On Wednesday, the Fed said that it might start withdrawing stimulus support from November. The statement raised confidence in the economic recovery.
Financial stocks were among the top movers on S&P 500 Thursday, while energy and real estate stocks declined. Stocks of BlackBerry Limited (BB) rose 12.08% a day after reporting quarterly results. Its revenue rose to US$175 million in Q2, FY21, from US$174 million in the year-ago quarter.
Accenture plc (ACN) stock jumped 2.63% after reporting its fourth-quarter results. Its net income was up US$1.43 billion from US$1.30 billion in the same quarter of the previous year.
Salesforce.com, Inc. (CRM) stock rallied 7.38% after it raised the full-year revenue guidance. It expects its FY 2022 revenue to be US$26.35 billion, up from its earlier forecast of US$26.3 billion.
In the energy sector, Exxon Mobil Corporation (XOM) rose 3.58%, Chevron Corporation (CVX) gained 2.51%, and ConocoPhillips (COP) gained 2.45%. Kinder Morgan, Inc. (KMI) and EOG Resources, Inc. (EOG) advanced 2.51% and 2.76%, respectively.
In the consumer discretionary sector, Nike, Inc. (NKE) increased by 1.26%, Starbucks Corporation (SBUX) gained 1.25%, and General Motors Company (GM) rose 2.24%. Ross Stores, Inc. (ROST) and Hilton Worldwide Holdings Inc. (HLT) ticked up 1.62% and 4.30%, respectively.
In financial stocks, Berkshire Hathaway Inc. (BRK-B) rose 1.65%, JPMorgan Chase & Co. (JPM) jumped 3.35%, and Bank of America Corporation (BAC) rose 3.79%. Wells Fargo & Company (WFC) and Morgan Stanley (MS) jumped 1.58% and 2.86%, respectively.
Futures & Commodities
Gold futures were down 2.05% to US$1,742.40 per ounce. Silver decreased by 1.71% to US$22.515 per ounce, while copper fell 0.48% to US$4.2317.
Brent oil futures increased by 1.38% to US$77.24 per barrel and WTI crude was up 1.37% to US$73.22.
The 30-year Treasury bond yields was up 5.04% to 1.941, while the 10-year bond yields rose 7.71% to 1.434.
US Dollar Futures Index decreased by 0.39% to US$93.100.dollar gold silver commodities policy fed us dollar
PVC Prices Hit Record High As Homebuilding Costs Soar
FOMC Signals Taper “Soon”, Shows Rate-Hike In 2022
Looking for the Next Big Crypto to Explode in 2021? Try These 5 Coins
60% Polled Expect Federal Reserve to Taper Bond Purchases Starting December
Three Key Takeaways From The Fed Meeting
When Will “Transitory Inflation” Overstay Its Welcome?
Escobar: Eurasia Takes Shape, Part 1 – How The SCO Just Flipped The World Order
China Syndrome? Is Evergrande A Symptom Of Deeper Malaise
Inflation Still Appears To Be Peaking, But For How Long?
Rabobank: We’re In A Charlton Heston Movie, But Which One?
Precious Metals11 hours ago
Rusoro Mining Stock Jumps After Venezuela Drops Its Appeal of US$1.62B Award
Base Metals12 hours ago
Top 20 Investors Speak on Uranium’s Returned Aura
Energy & Critical Metals11 hours ago
Cameco Signs MOU to Supply Uranium for SMR’s Built by GE Hitachi, Synthos Green Energy and GEH SMR
Base Metals23 hours ago
House Progressives Strip $1BN In Military Aid For Israel From Stopgap Funding Bill
Articles23 hours ago
Eagle Mountain reckons visual mineralisation at Western Talon is ‘truly spectacular’
Precious Metals8 hours ago
Palladium One Shares Jump 10.26% After Reporting Drill Results 112 metres of 2.08% PdEq at LK, Finland
Energy & Critical Metals15 hours ago
Lyten introduces next generation Lithium-Sulfur battery for EVs; 3X energy density of Li-ion
Energy & Critical Metals6 hours ago
Uranium Rally Signals New Generation of Nuclear Energy Acceptance