It feels good to be back in California. I just spent the past week in Texas, and before that I was in Toronto and Philly. I won’t be leaving the west coast for a few months and I couldn’t be more thrilled about it. I like it here.
When you force yourself to leave to computer screen as much as I do, you’ll quickly learn the value in getting away and then coming back to reevaluate everything you previously thought before you left. There is a lot of data waiting for you once you’re back at the desk. Is there enough data to change your mind or does it just confirm what you felt previously?
I spent last weekend, both Saturday and Sunday, looking through charts and enjoying the start of Football Season. At this point, College and Pro Football have each begun. Back when I lived in New York, this was my favorite time of the year: September and October. The weather is the best and everyone is back from their weekends in the Hamptons, Jersey Shore, Cape Cod or various other northeast vacation spots. The city gets going again. But so do the markets.
The past couple of weeks are what I like to refer to as the 7th Inning Stretch for the calendar year. Now that the adults are back in the room we can see whether there is risk appetite for stocks, or if they come in selling. The way I see it, most of the institutions are not happy with their performance this year. A lot of what I’m hearing from my hedge fund and RIA clients is that diversification has cost them greatly in 2018.
Unless you’ve been 100% invested in U.S. Stocks, you’re not beating your traditional benchmarks. Any sort of Emerging Market or European exposure has been turned out to be a poor decision. It’s such an interesting phenomenon that what is considered to be “common sense diversification” among many portfolio allocation strategies, has cost investors dearly this year.
I came back from Texas open minded, knowing that major indexes were flirting with their former highs in January and a potential failure up here could set up all sorts of bearish momentum and breadth divergences (the bears keep reminding me of it on the twitter). I’m still open to the possibility of a complete collapse in the U.S. equities market. But based on the weight of the evidence, it seems clear that there are just a lot more stocks I want to buy than stocks I want to sell. It doesn’t have to be that complicated.
When asked about what I think the catalyst could be to take stocks to another level, I think rates breaking out could be one. If the U.S. 10-year yield were to convincingly break out above 3% and rip towards 4%, we could see a lot of money rotating out of bonds and looking for a home. Unless 10s are above 3%, I don’t think there is any reason to blindly be shorting U.S. Treasury Bonds, but I do think there is a big opportunity coming.
I encourage everyone to get away from their screens and come back after some time to reevaluate. The day to day distractions from the poisonous media outlets can get overwhelming. It really is a cancer to your portfolio and only gets worse as it builds up over time. It’s funny, they had the financial tv channels on in the business center at my hotel in Houston. I immediately felt my anxiety levels rising as they made it seem like if I was not paying attention to them, that I was somehow missing out on important information. Some dude with a British accent was explaining to me how stocks had massive sell-offs throughout the day (the Dow was flat).
It was clear that my body was rejecting the noise coming from this plasma on the wall. I’ve found it helpful to listen to your body. As a former athlete, we were always taught to pay attention to pains and recovery times in specific muscles. Ignoring it could make things worse. I encourage music during the work day, not “business entertainment”.
The rest of the trip was amazing. I had some killer BBQ and gave presentations in Dallas, Austin and Houston. We had great turnouts and awesome conversations. I was hanging out with Mike Hurley, who I’m trying to get on the podcast. He does amazing work and there is a lot we can all learn from him. He brought out the cocktail napkin, still wet from my bourbon on the rocks, and started drawing charts. This is such a classic move that I just loved being a part of it. He made a great point that this was 1953 all over again. That year came within an ongoing secular bull market and the S&P500 corrected 14-15% or so.
The S&P500 doubled from there. So did the Dow Jones Industrial Average.
I keep hearing from the people on the Twitter that the stock market is going to collapse and this is 1987 or 1929 all over again. Those analog charts have proven to be completely useless, and have even done a lot of harm to the poor people who took action because of them. They make a great headlines, but they’re not for us.
I think the 1953 angle makes a lot of sense considering where sentiment is today. If you divide the current market sentiment into 4 buckets: Very Bearish, Kind of Bearish, Kind of Bullish and Very Bullish, I would argue that the last one, Very Bullish, would be the most empty of the bunch. I’m still in the camp that we’re in the early stages of a new bull market, and no where near the end of the cycle.
Let me know what you think!
Here are some pics from the week: