Monday, January 3, 2022

Morning Note: Are We Looking At Classic Bull Market Conditions?

Interesting start to just another day.

In less than an hour of trading US stocks have been all over the board; up .50%, then negative 0.10%, now up 0.04% (SP500 my proxy).

Bonds are screaming lower (rates higher): Apparently there's something about the reality of coming Fed rate hikes, or inflation, or both, that has bond traders positioning themselves "accordingly?" this morning.

Well, ironically, as I suspect we'll find, once the Fed actually makes good on a rate hike or two, longer-term yields will likely roll over, as hikes will likely be viewed as a growth killer. That said, if inflation hasn't abated by then (as we expect, despite our longer-term structural view)... well, that'll be interesting.

The 2-year treasury yield has spiked from 0.73% to 0.80%, that's a big 9.5%, and signals that indeed the bond market is fully expecting the Fed to begin hiking early this year. There's plenty of Fed-speak on the calendar to confirm that notion.

Over the next few days we'll, via sharing a highlight, keep the key points in our lengthy year-end letter front and center.

From Part 1:

"We can sum up basketball shooting as follows. There are:

1. Good shots that go in.

2. Good shots that miss.

3. Bad shots that miss.

4. Bad shots that go in.

#1's are great.

#2's are fine, unavoidable, and possess a livable probability rate.

#3's, while costly, are the most predictable and, therefore -- being costly -- should be readily avoided.

#4's, as explained above, are an utter curse!

Here's my point:

We can sum up investing in precisely the same fashion. There are:

1. Good investments that make money.

2. Good investments that lose money.

3. Bad investments that lose money.

4. Bad investments that make money.

#1's are great.

#2's are fine, unavoidable, and possess a livable probability rate.

#3's, while costly, are the most predictable and, therefore -- being costly -- should be readily avoided.

#4s: I can't think of a worst-case scenario than a new investor hitting a #4 right out of the gate. The perverse feedback from that experience could absolutely send him/her to the poorhouse -- as he/she might think that he/she's discovered a high probability investing method and chalk up the subsequent string of losses to rotten luck. I.e., believing what are in reality #3s to be #2s. The emotional imprint from that early "success" may indeed last longer than his or her capital."

Several Asian markets were shuttered overnight, although India and Indonesia saw nice rallies (1+% each), while the Philippines and Malaysia went the opposite direction.

Britain's market is closed this morning, but the other 18 bourses we follow are open for business. And all of them are up on the session as I type.

US major averages are back in the green: Dow up 99 points (0.27%), SP500 up 0.30%, SP500 Equal Weight up 0.22%, Nasdaq 100 up 0.40%, Nasdaq Comp up 0.57%, Russell 2000 1.71%.

Oil futures are up 0.36%, gold's down 1.44%, silver's down 1.67%, copper futures are down 2.28% and the ag complex is down 0.30%.

The 10-year treasury is down (yield up) and the dollar is up a big 0.63%.

Led by uranium miners, Viacom/CBS, oil services companies, MP (rare earth miner) and AMD (chip maker) -- but dragged by base metals futures, healthcare stocks, silver, gold and ALB (lithium miner) -- our core allocation is up 0.33% to start the session.

As we've made clear, we're not in the business of predicting bear, or bull, markets. We are, however, in the business of measuring and managing risk. 

Russell Napier, in his insightful book Anatomy of a Bear, teaches the reader how to spot the bottom of a bear market (i.e., the time to load up the truck with stocks). 

Here he spells out the conditions that signaled the bottom of the 1921 bear market. Take note of the areas I bolded and ask yourself, is there anything about today's setup that rhymes with the setup back then? In other words, are today's conditions at all consistent with the classic conditions that tend to precede extended bull markets in stocks?

"How was an investor to know that 1921 was the opportune moment to invest?
As we have seen, there was a combination of signals in the summer of 1921 suggesting it was time to buy: improving demand at lower prices for selected goods, particularly autos; commodity price stabilisation; improving economic news being ignored by the market; rising volumes on a strong stock market; falling volumes on a weak stock market; a rising short interest; a final fall in equity prices on low volumes; reductions in Fed controlled interest rates; a rally in the government bond market; a rally in the corporate bond market; positive signals from the Dow Theory.
This is the checklist of features one needs to focus on if one seeks the bottom of the bear market."

Well, as you've noticed, while demand for goods remains healthy, we're definitely not talking "at lower prices, particularly autos."  The volume action has been opposite the above for quite some time (i.e., falling volume on rising prices, rising volume on falling prices). Short interest overall is relatively low. The Fed's looking to raise their "controlled interest rates" going forward, and transportation stocks have actually been flat since mid-last year (Dow theory reads bullish when transports match or outperform the broad market).

SP500 top panel, SP500 Transportation Index bottom:

Again, no prediction here (other than volatility). Just noting that the underlying setup may not entirely jibe with the prevailing bullishness...

Have a great day!

No comments:

Post a Comment