Charlie Brown vs. The Football David Alan Carter
If you’ve been watching the market every day in May, a masochistic activity I do not advise, Amazon should be delivering your foam neck support brace any time now.
May has been characterized by the whipsaw – the movement of stocks in a volatile market when a stock price will suddenly switch direction. It’s been happening at the stock-specific level and to the market in general.
If you’ve been watching the market every day in May, a masochistic activity I do not advise, Amazon should be delivering your foam neck support brace any time now.
May has been characterized by the whipsaw – the movement of stocks in a volatile market when a stock price will suddenly switch direction. It’s been happening at the stock-specific level and to the market in general.
The Nasdaq has a 1.5% up day on May 23, signaling that it may have put in a bottom and it’s blue skies ahead. Not so fast. After hours, social media company Snap posts a cautionary outlook and the next day the company is down over 40% and the Nasdaq plunges 2.5%.
Charlie Brown and the Football
It seems every day it’s hapless Charlie Brown running toward the football, his only worry being whether or not to raise his cartoon arms to the cheering crowds. But his trust in Lucy is misplaced. Of course, she winds up pulling the football away just in time for him to miss the kick and launch into the air, nose to the sky, screaming “AUGH!” before landing flat on his back, bruised and full of self loathing.
With the S&P 500 falling for seven consecutive weeks, its worst stretch since the dot-com bubble burst more than two decades ago, most investors haven’t been able to kick the football worth a darn. The professionals and the institutions are no better; Tiger Global down 40% year-to-date, and Melvin Capital, the hedge fund torpedoed by the GameStop frenzy, shutting down after ongoing losses.
And according to a May 6 article in Bloomberg, there are no positive returns so far this year among a list of the 100 largest 401(k) funds provided by data firm BrightScope, and all but 12 have posted double-digit losses.
But surely there’s a patch or two of blue in this otherwise dark sky. Right?
Demand Destruction
I suppose you could call this good news: the Fed is slowly closing in on its goal of demand destruction. The housing market is showing signs of weakening due to historically high prices coupled with rising mortgage rates. Used car prices are inching down. And across-the-board losses for U.S. retailers are likely signaling that inflation is eating into main street’s wallets. Yay (I think)!
Inflation Moderating
Though still elevated, inflation is showing signs of moderating. The Commerce Department’s personal consumption expenditures, the Fed's favorite inflation gauge, rose 6.3% in April from a year earlier, a deceleration from the 6.6% pace seen in the previous month. And the more closely-watched inflation gauge, the consumer price index, inched down to 8.3% in April from 8.5% in March. These are still obscene numbers, but the trend holds promise and [maybe, maybe] gives the Fed some breathing room.
Treasuries Are Trying To Stabilize
Treasury bonds look as though they are trying to bottom, and for the past couple of weeks have hinted at the long-awaited return to the inverse correlation they used to provide to equities. Is the bond bottom real or another head fake? Too soon to tell, but it’s food for the optimists.
Robot Orders Increase
Finally, under the category “What?” Orders for workplace robots increased by 40% in the first three months of 2022 amid a labor shortage in the U.S. This, according to a May 30 article in Yahoo Finance. So there’s your good news for robots. But it prompted this sole comment from someone named Douglass: “Makes perfect sense. Spend more money on robots rather than offer better wages. I need to get off this planet… it’s going insane.”
For those of us planning to stick around this planet, June begs a couple of questions. Has the market bottomed, or just pausing before taking another leg down? Are stocks set to rally, and if so, is it a bear market rally – or the real thing this time?
The June football is on the field, Lucy’s holding. She wears a poker face. Charlie Brown winds up and starts his run.
Charlie Brown and the Football
It seems every day it’s hapless Charlie Brown running toward the football, his only worry being whether or not to raise his cartoon arms to the cheering crowds. But his trust in Lucy is misplaced. Of course, she winds up pulling the football away just in time for him to miss the kick and launch into the air, nose to the sky, screaming “AUGH!” before landing flat on his back, bruised and full of self loathing.
With the S&P 500 falling for seven consecutive weeks, its worst stretch since the dot-com bubble burst more than two decades ago, most investors haven’t been able to kick the football worth a darn. The professionals and the institutions are no better; Tiger Global down 40% year-to-date, and Melvin Capital, the hedge fund torpedoed by the GameStop frenzy, shutting down after ongoing losses.
And according to a May 6 article in Bloomberg, there are no positive returns so far this year among a list of the 100 largest 401(k) funds provided by data firm BrightScope, and all but 12 have posted double-digit losses.
But surely there’s a patch or two of blue in this otherwise dark sky. Right?
Demand Destruction
I suppose you could call this good news: the Fed is slowly closing in on its goal of demand destruction. The housing market is showing signs of weakening due to historically high prices coupled with rising mortgage rates. Used car prices are inching down. And across-the-board losses for U.S. retailers are likely signaling that inflation is eating into main street’s wallets. Yay (I think)!
Inflation Moderating
Though still elevated, inflation is showing signs of moderating. The Commerce Department’s personal consumption expenditures, the Fed's favorite inflation gauge, rose 6.3% in April from a year earlier, a deceleration from the 6.6% pace seen in the previous month. And the more closely-watched inflation gauge, the consumer price index, inched down to 8.3% in April from 8.5% in March. These are still obscene numbers, but the trend holds promise and [maybe, maybe] gives the Fed some breathing room.
Treasuries Are Trying To Stabilize
Treasury bonds look as though they are trying to bottom, and for the past couple of weeks have hinted at the long-awaited return to the inverse correlation they used to provide to equities. Is the bond bottom real or another head fake? Too soon to tell, but it’s food for the optimists.
Robot Orders Increase
Finally, under the category “What?” Orders for workplace robots increased by 40% in the first three months of 2022 amid a labor shortage in the U.S. This, according to a May 30 article in Yahoo Finance. So there’s your good news for robots. But it prompted this sole comment from someone named Douglass: “Makes perfect sense. Spend more money on robots rather than offer better wages. I need to get off this planet… it’s going insane.”
For those of us planning to stick around this planet, June begs a couple of questions. Has the market bottomed, or just pausing before taking another leg down? Are stocks set to rally, and if so, is it a bear market rally – or the real thing this time?
The June football is on the field, Lucy’s holding. She wears a poker face. Charlie Brown winds up and starts his run.
As noted before, long term, the strategies will get the trends right. Short term, there may be a miss or two as the market juggles conflicting signals. So keep allocations of strategies reasonable within your portfolio, and remember that protection** remains paramount.
Best always,
David
________
** What does protection look like? At the extreme, it’s cash. As I mentioned last month, it’s OK to hold some cash. Cash is, in fact, a position. It means you’re prepared to act when circumstances better align with your risk tolerance.
Protection can also mean an overweight position in a model built for protection (i.e., Bond Bulls, Lean Muscle, The 12% Solution). It can mean putting multiple strategies to work in a portfolio, especially when those models tend toward an inverse relationship with each other, or focus on different asset classes or market sectors. Think Bond Bulls and American Muscle. Or Global Trader and The 12% Solution.
Because each strategy uses a slightly different mechanism to identify market risks, and because each can employ different funds representing different market sectors (although there is obviously some overlap), there is beneficial diversification at work when using multiple strategies within a portfolio – helping to reduce volatility and max drawdown.
Finally, protection can mean keeping an eye on the provisional picks during the month. These can provide a heads-up on potential trends -- and breakdowns of existing trends. Look for asset class shifts (a switch from an equity fund to a safe harbor asset like cash or bonds, or the contrary). See if such a shift holds up for a few days. Not every such move is a trading opportunity or justifies a rebalancing, but information is power.
Best always,
David
________
** What does protection look like? At the extreme, it’s cash. As I mentioned last month, it’s OK to hold some cash. Cash is, in fact, a position. It means you’re prepared to act when circumstances better align with your risk tolerance.
Protection can also mean an overweight position in a model built for protection (i.e., Bond Bulls, Lean Muscle, The 12% Solution). It can mean putting multiple strategies to work in a portfolio, especially when those models tend toward an inverse relationship with each other, or focus on different asset classes or market sectors. Think Bond Bulls and American Muscle. Or Global Trader and The 12% Solution.
Because each strategy uses a slightly different mechanism to identify market risks, and because each can employ different funds representing different market sectors (although there is obviously some overlap), there is beneficial diversification at work when using multiple strategies within a portfolio – helping to reduce volatility and max drawdown.
Finally, protection can mean keeping an eye on the provisional picks during the month. These can provide a heads-up on potential trends -- and breakdowns of existing trends. Look for asset class shifts (a switch from an equity fund to a safe harbor asset like cash or bonds, or the contrary). See if such a shift holds up for a few days. Not every such move is a trading opportunity or justifies a rebalancing, but information is power.
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