The Risk In Owning Stocks Is Elevated

February 25, 2020

The risks associated with owning stocks are currently elevated.

There are a lot of things I can say, levels I can point out, possible outcomes I can walk you through, all those things. But the one common denominator between all of those is that the risk in owning stocks is currently higher than it normally is.

This is an important time to remember your original investment objectives, time horizon and risk parameters. Before buying a stock, or entering any investment for that matter, these 3 questions need to be answered. I can't answer them for you. But what I can do is show you what we're seeing from an intermediate-term horizon.

Our goals here are to make money this quarter. We care about the coming weeks and months. It doesn't matter to us what the market does next year, and it doesn't matter what it does today. Weeks and Months. That's our focus.

For this time horizon, the risk of owning stocks has been elevated. I believed the weight-of-the-evidence had been leaning this way the past month, but we're just now starting to see it affecting large-cap stocks. We've seen the deterioration of market breadth since mid-January. We've seen the flight to safety bid in Bonds. And now we're seeing breakouts that Stocks had been attempting failing all over the place.

Here is a perfect example of what's happening. The S&P500 had one last push through our key 3300 level until completely collapsing back below it. And this wasn't like a small correction either. This was a weekly gap lower. How I learned it, this is a potential breakaway gap, suggesting this is just the beginning, and no where near the end, of the selling pressure:

I'm thinking best case scenario, stocks continue to chop around for a few more months like they have been most of the year. If you think the S&P500 or Dow Jones Industrial Average is "the market", you are very mistaken. This is a market of stocks. Regional Banks peaked in mid-December. They were making new all-time relative lows weeks ago. Both the average and median stock were down over the prior month ENTERING LAST WEEK. So this is not new information. There has been plenty of time to raise cash.

Moving forward, our focus remains on the bond market. I'm not trying to get cute and bottom fish crashing tech stocks. In fact, our plan had been to sell Tech stocks this month, so there's been no reason to be in them in the first place. I don't believe it's now the time to get back in, and I don't believe that time will be any time soon either.

This might be the most important chart for stock investors. It shows the US 10-yr Yield potentially about to break below the lows from the past decade:

What do we know?

Rates are in a long-term downtrend. Duh. But consolidations tend to resolve in the direction of the underlying trend right? And this 8-year consolidation comes within an ongoing downtrend. So a break below 1% looks like the higher probability outcome here no?

Notice how I use a logarithmic scale chart above. This becomes more important as you get closer to zero and the % changes are much larger on the chart than where rates were 35 years ago. We could see a complete collapse in rates here, which would send bond prices ripping higher.

This chart looks like the bond investors are already starting to get ahead of this break in rates. Here are new all-time highs for the index fund that tracks the benchmark yields:

This is the move in bonds we've been aggressively betting on. And I think we're just now starting to be right.

And as I keep getting asked, "JC can stocks and bonds move up together like in 2019?".

The answer is yes, that is possible. But it is certainly not the bet we're making.

You guys following me for a long time know that when there are a bunch of stocks we want to buy, I'll show you a lot of them. Usually, we have a list of stock trade ideas as long as a CVS receipt. But sometimes, the market environment calls for a different strategy.

The way to do this is NOT by creating a strategy and forcing that strategy upon the market no matter what the environment is. The key is to FIRST, identify what type of market environment we're in. AND ONLY THEN, can we give more weight to some tools than others, and pick strategies that historically do best in that type of environment.

As Bruni says, you're not going to use a hammer to brush your teeth right? When it's time to go to sleep, you're not looking in the shed for your power tools. You're probably in the bathroom looking for toothpaste. See the difference? When it's time to hang a mirror on the wall, then you'll reach for the nails, not the floss.

Think of the market in the same way. I know some people love a long list of trade ideas and always want to be putting new money to work. But today is just not the day to do that. I encourage you to go back to the trade ideas list: We opened up all our ideas for 2016 and 2017 so you can go back and see for yourself. Those were times to be aggressive from the long side, and we laid out the plan accordingly. This is a different environment. If we don't recognize that first, then we'll be trying to floss with sledge hammer.

This is the market we're in. Embrace it or fight it.

If we're above 113 in the bond fund $IEF we want to be very aggressively long with a target up near 123.

We still like bonds, not stocks. Risks are elevated.

Let me know what you think. Do you agree? Are you bottom fishing Tech stocks? Happy to discuss.