However, in this post we're focused on the current mean reversion we're seeing in stocks around the globe and how to profit from it. We'll worry about later this year later this year.
I spent the New Year in Lake Tahoe, which is one of my favorite and most beautiful places in the world. Heading up to the lake with family and friends for a few days (and leaving my laptop at home) really helps clear my head and let's me focus on the environment we're currently living in. I see again and again people trying to compare today's market to "the average" of a dozen or so bear markets in the past. It's painful to watch.
It's hard to remember a time where I saw this much irresponsibility among investors, especially the pros who should know better. These "asset managers" are so busy dealing with investors, compliance, operations, marketing, regulations and whatever else they're busy doing, that they've completely underestimated the amount of risk in the stock market. It's like they forgot that risk is a real thing.
And what are they doing to justify their actions, or lack thereof? They're relying on a tiny sample size of prior market declines to "wait and see" what happens. They think they're "Portfolio Managers", but they should be "Risk Managers". There's a huge difference.
It's been a great couple of months for Bond bulls. As unprepared investors worry about their portfolios and financial media outlets irresponsibly call this market "crazy", we've been happy to watch the destruction of stocks and new flow of money into safer, fixed income assets. Interest rates have gotten slammed with stocks and bonds ripped. One for the good guys!
So the question now becomes, how low can rates go?
This is one of my favorite things to do: Forget everything that happened this quarter and this year and start from scratch. It doesn't matter what we did or how we felt in 2018. It's irrelevant. We're moving forward. This is my Q1 2019 Playbook.
Yesterday after the bell we sent out our Year End '18 ETF Risk Update to our Institutional Clients, covering 100+ of the most actionable and informative charts. To put this report together we examined over 500 inter-market and cross-asset relationships across weekly & daily time-frames to identify trend direction, momentum, risk-management levels, and prices targets.
In this premium post I want to highlight a few charts from each of our five sections: Factors, International, Domestic, Fixed-Income, and Thematic/Niche. If you like what you see and want the full report, you can fill out our Institutional Client Application or contact our Head of Institutional Sales, Jonathan Bloom, for access.
Having Trading Psychologist Dr. Brett Steenbarger on the podcast was a huge treat for me. He works with the best traders on planet earth on a daily basis. Needless to say, when Dr. Brett is telling me something, I want to listen. In this episode, he let me ask him all the questions I was curious about and he happily answered them all with solid advice and relevant anecdotes. We make a lot of mistakes as investors because of our many flaws as humans. When our stress levels are elevated we start acting emotionally, instead of rationally. Taking losses is a difficult task for us, even though we all know that losses are part of the deal. I really enjoyed this conversation and it could have gone on forever if I didn't end it. I hope you get as much value from this chat as I did.
Bonds Funds are breaking out to new 3-month highs. This comes after consensus this September was for higher US rates, and therefore, lower prices for bonds. When the market is leaning too much in any one direction, the unwind of that extreme positioning can be intense. That's what I believe has been happening throughout the 4th quarter.
Here are two charts that show rates could continue lower for some time. The first is a long-term chart of the US 10-year Yield failing to break out above the downtrend in place since 1981:
A conversation with Arun Chopra is one that makes you smarter. That's how I see it. Arun has formal training as both a CFA Charterholder and a CMT. He has helped produce award winning films at the Sundance Film Festival and he's on the same journey as us: to make money in the market. He uses a combination of global macro, technical and sentiment indicators that he is working on putting into a more quantitative model. Picking his brain about the process and his experiences in this endeavor was really enlightening. In this episode we discuss current markets, sector rotation, credit spreads widening and the possibilities for the US Stock Market Indexes to break to new lows. I really enjoyed this discussion with Arun. I always do.
You hear it all the time, "Cash is King". But we forget that it really can be. Not all the time, very few times in fact, but cash does serve a great purpose.
There are a lot of institutions that are not allowed to go to cash, as part of their mandate. The majority of investors, however, do have that option. Why not use it?
You're going to see a lot of the passive investing community advise against cash. "Market sell-offs are an opportunity to buy more at lower levels", they say. "You're not disciplined or smart enough to get back in", they preach. "Just buy and hold and everything will be ok". It's all based off this theory that the market always goes up. I guess if you trust data based off the tiny sample sizes that we have, you'll believe anything.
It's a market of stocks, after all. The indexes are one thing, but the components that drive them are another. Last week we laid out a list of the stocks we wanted to be buying for a December rally. The idea was to get involved with stocks already working, rather than trying to get cute and bottom fish the underperformers.
We'll see how that works out. In the meantime, let's take a look at market breadth.
Whenever in doubt, zoom out. Monthly charts are a great way to do that. On November 30th we got new daily, weekly and monthly candles. This is a lot of new data that we have to work with.
