From the desk of Willie Delwiche.

In last week's Perspectives piece, we opted not to wade into the discussion of capitulation and proactive efforts to call a bottom. The best evidence of a bottom is only available after the fact and by that point, the focus is already on whether the ingredients for a sustainable rally are present. 

Our checklist is designed to move the conversation along in a productive direction. We are looking for conviction that rally attempts either are or are not sustainable. Among the indicators we are paying attention to in this regard is our Risk On / Risk Off Indicator. Our focus this week is on this and other Risk On / Risk Off metrics. Our Risk On / Risk Off Indicator is not based on a specific market signal but is the accumulated message across several pairwise comparisons within and across asset classes. 

The message right now is clear: The Risk Off environment we have been in since earlier this year remains intact. 

Breaking down the various components shows that we aren't seeing...

From the desk of Willie Delwiche.

Key Takeaway:

• Friday’s rally needs follow-through to change the environment.
• Narrow strength and broad weakness producing more new lows than new highs.
• Yields pull back, but stress is building.

After Friday’s bounce, the Value Line Geometric index is at the same level that it was to begin 2021, which is also where it was to begin 2018. For those so inclined, it hasn’t been so much a buy-and-hold environment as it has a buy-and-hold-on-tight environment. While there have been pockets of strength along the way, they have not persisted. The challenge for the indexes right now is that the sectors that are seeing the best strength are relative lightweights. Between 60% to 80% of stocks in the Consumer Staples, Utilities and Energy sectors are trading above their 200-day averages (for the S&P 1500...

From the desk of Willie Delwiche.

The preliminary May reading for the Consumer Sentiment Index (published by the University of Michigan) dropped to one of its lowest levels on record. The Expectations component is still above its March low, while the view of Current Conditions is at new cycle low - and at its lowest level since late 2008. That’s right - things are seen as worse now than they were at the worst of the COVID-related shutdowns. At one level this seems ludicrous - the S&P 500 is just a few months removed from record highs and pretty much anyone who wants a job can get one. On the other hand, everyone is seeing surging prices at the grocery store and gas station. They see surging balances on their credit card statements, but collapsing balances on their brokerage statements. This an unfamiliar environment for an entire generation of investors who have never experienced a double-digit year-over-year drawdown in the NASDAQ 100. It’s particularly acute for investors who listened to the advice of “experts” and have bought every dip this year. We don’t need to look at this incredulously and suggest things aren’t actually as bad as they have been in...

This is the video recording of the May 12th Weekly Town Hall w/ Willie Delwiche.

05/12/22 2:00 PM ET

 

From the desk of Willie Delwiche.

Volatility is on the rise and some of the reactions we’re seeing are entirely predictable.

For instance, I’ve seen multiple versions of this chart shared in recent weeks:

It claims to show how hard it is to effectively time the market. Advisors and strategists use this to scare investors with a seemingly straightforward message: If you miss just a handful of the best days in the market, your returns will suffer.

From the desk of Willie Delwiche.

Key Takeaway: The unwinding of a liquidity-fueled speculative bubble is weighing on investor sentiment, pushing many indicators into areas that signal excessive pessimism. The challenge in the current environment is the disconnect between how investors say they are feeling and what (if anything) they are doing about it. Popular sentiment surveys are so widely watched that they seem to be producing more noise than signal. This makes less widely followed surveys (like those from Consensus and NAAIM) more useful. ETFs overall have begun to experience outflows, but there is still plenty of evidence that investors are looking for ways to increase equity exposure.

Sentiment Report Chart of the Week:  Buying Weakness Isn’t Evidence Of Fear

Echoing the message from the AAII asset allocation survey is a Investor Movement Index from TD Ameritrade that shows investors were “net buyers of equities in April.” That’s an unlikely way to express the fear and pessimism that is evident elsewhere. A...

From the desk of Willie Delwiche.

A risk off environment persists. Leadership areas are coming under pressure as market correlations rise (as they typically do in periods of stress). We are reducing our exposure and move to the sidelines to ride out this period of volatility.

From the desk of Willie Delwiche.

It’s hard to get away from the crowd when you only ask the questions that everyone else is. When we ask better questions, we get more relevant answers. The questions being most asked right now focus on whether we are going into a bear market and whether we are seeing capitulation (“Was that the bottom?”).

• A bear market has been evident beneath the surface (at least since late 2021, but in some ways for over a year). It’s now showing up in the indexes. The Value Line Geometric Index is below its 2018 highs (as well as its Jan 2020 pre-COVID peak) and is in a 20% drawdown (the line in the sand many use to identify bear markets).
• I understand the allure of trying to call a bottom in real-time (or close to it). But I’ll let the market sort that out. The crowd, focusing almost exclusively on their favorite sentiment data, has been doing that all year and so far at...

From the desk of Willie Delwiche.

Key Takeaway:

• Volatility is taxing investor portfolios
• Stocks reckoning with new liquidity regime
• New lows are expanding as selling pressure crescendos

Stocks remain weak and selling pressure has intensified. Risk On indexes are breaking down and the Risk Off environment remains intact. Some see volatility as the price of admission that investors need to pay to receive the long-term return potential in stocks. I see it as a portfolio tax that you are better off not paying. It should not be a surprise that in avoiding an equal number of the best and worst days in the market, portfolios experience less volatility and better returns over time. While we cannot hand select the days we want to avoid, we do know that the biggest up-days and down-days tend to cluster together in periods of market stress....

From the desk of Willie Delwiche.

Our weight of the evidence dashboard argues for caution, as risk outweighs opportunity. This is echoed by our Risk Off - Risk On indicators, which never showed a decisive move toward Risk On assets as stocks moved off their lows in March. Assessing the situation through the lens of various intra- and inter-market relationships, our range-o-meter shows a move toward Risk Off leadership over the past month. Risk Off assets are gaining strength, Risk On assets are stumbling. Where things go from here remains to be seen. None of us can predict the future. But we can identify whether we are in a higher risk or lower risk environment and adjust our portfolios accordingly. One of the best things I heard at last week’s CMT symposium came from Frank Teixeira: “The market gives you a lot of information if you are willing to listen for it.”        

This is the video recording of the May 5th Weekly Town Hall w/ Willie Delwiche.

05/05/22 2:00 PM ET

 

From the desk of Willie Delwiche.

I had a great time in DC last week, first for some dedicated time with the All Star Charts team that is normally dispersed all over the world, and later at the CMT Symposium itself. There was good food and drink and great conversations – in larger settings and small. 

As great as the presentations were overall, I often found myself chewing on asides and tidbits more than the large macro points. For me, the key insights were more about process and less about conclusions. Maybe that’s not surprising. Conclusions come and go based on market conditions. But process and approach should be consistent (though not immune from the refiner’s fire). I think Tyler Wood said it best last week, “We’re not predicting the future, just reacting responsibly.”

Things I picked up last week that I want to hold on to: