October 23, 2022
Weekly Market Outlook
By Keith Schneider and Donn Goodman
Put on your red shoes and dance the blues
To the song they're playin' on the radio
While color lights up your face
Sway through the crowd to an empty space
If you say run, I'll run with you
If you say hide, we'll hide
Because my love for you
Would break my heart in two
If you should fall
Into my arms
And tremble like a flower
Let’s Dance by David Bowie
(This week this song is significant for a couple of reasons. First, it’s very appropriate after attending a friend’s wife’s funeral this morning. After a long battle with cancer, she succumbed to the disease last Saturday and left 3 beautiful daughters and my friend Andy. We should all DANCE today for we are very blessed to be alive.)
Secondly, it’s a perfect basis for a 2022 bear market parody that goes something like this…
Put on your computer and dance with the bear market
Make the next move in the stocks
Let’s play the market
While the next trade speeds up your pace
Through the noise to a profitable place
Then the chorus would be as follows:
If you say trade, I’ll trade with you.
If you say sell, we’ll sell
Because my love for trading
Can break my bank in two.
It might smash my account
Then I will tremble like a coward
AND, there’s more…
I will admit it. I like action. Ever since I was young and raced dirt bikes. I like sports and also like watching fast cars whizzing along the track at almost 200 mph. Action packed movies are also so fun.
I don’t gamble, but I love to trade. I have my share of scars and bumps from bad trades over the years. Probably acting too quickly or too impulsive. That is why I like algo-based dynamic strategies. That is why I like what we do at MarketGauge so much. No matter what type of trader or investor you are, we have successful strategies you can follow.
As I get older, I have come to understand that investing runs in cycles. There are different investment periods where some strategies work and others don’t. Times when one should have patience and let trades run and other times, like the one we are currently in, when one is served far better by using a trader’s mentality.
Principally, this means cutting losses short, taking profits more quickly, and managing the portfolio as a professional trader or hedge fund manager might do. Learn to play the Market DANCE!!!
The MarketGauge Dance
I do not wish to sound like an advertisement right now but more of a coach or cheerleader.
Understand that I departed a very large and successful money management firm in NY joining MarketGauge to help it grow and evolve.
When I left that career of 23 years on Wall Street for this financial publishing and asset management firm, I did not realize how propitious my timing might be. I had no idea that within a few short months that a vicious bear market would begin.
All of us at MarketGauge have been through these before. For me, being involved with billions in assets under management, I vividly recall riding the storm out in 2000-2002 and then again during the major bear market of 2007-2009.
Having gone through it with many clients, friends, and our large universe of Financial Advisors, I recall how emotional, fearful, and shaken investors became as things went from bad to very bad. Before eventually recovering. I also learned that few people are willing to admit or discuss that it took years (or almost a decade) to get back to even. Drawdowns are caustic and damage one’s portfolios for many years or possibly a decade as they did from 2008-2016.
At MarketGauge we have designed a suite of dynamic, algo based strategies (stock and ETF programs) that are intended to prioritize risk management tools, first and foremost. These strategies are intended to mitigate the drawdowns (maximum amounts that you go down before recovering) so that you can preserve capital in bad markets. (To be accurate, drawdowns should include costs including asset management fees).
Preserving your capital when markets are unfavorable inevitably gives you more $ to work with when the markets transition over to a positive and new bullish period.
At MarketGauge we currently offer a large swath of different types of investment strategies. All exploit different investment edges and most are algo based.
We have put these strategies together using a synergistic methodology and now offer them through our own management (autotraded through MarketGauge Asset Management). We have also designed optimized risk managed blended portfolios that we directly manage for investors.
Several of these blended portfolios are down minimally for the past 12 months and have returns that are twice that of their market benchmarks for the longer period (3 and 5-years periods or longer). What we are most enthusiastic about is the risk characteristics of these optimized blends.
Reach out to Rob Quinn or any of us to find out more about the autotraded strategies as well as the portfolio blended management.
The Continuing Stock and Bond Markets Tug of War,
Negatives and a few Positives:
We are still in the midst of volatile and fast changing markets. Recently we have had several quick reversal days when the market started off down and moved up Or vice versa.
Fridays have been a particularly bad day in the markets during 2022. The average return of Fridays has only been worse in 2001 and 1937. See chart below.
It looked like we were going to have another negative day this past Friday. Several important things occurred, however. First a news story (Wall Street Journal) broke that the Fed might be considering reducing their aggressiveness. This turned stocks immediately.
Second, and probably more impactful, were aggressive actions taken by the Bank of Japan. The Yen is down 31% against the US $ and the BOJ moved swiftly to prop up their currency (the Yen had recently hit a new 40 year low) by buying up our bonds (and other securities) helping to rally our financial markets
For the week, the S&P and Dow found its footing rising almost 5%.
However, most analysts and economists believe things may get worse yet and that this nothing more than another bear market rally.
No better evidence to demonstrate the negative sentiment that still hovers over our stock market than looking at the massive amount of put buying that continues. Portfolio and hedge fund managers “hedging” their portfolios as well as individual investors speculating that we will see more room to the downside.
Also, the public has been investing in inverse ETFs which play the downside. We have owned several of these in our ETF strategies. Inevitably, the ETF manager has to invest in swaps or other derivative instruments that are essentially buying puts to hedge the portfolios. It hasn’t been since 2008 that put premiums have been this expensive. See chart below: (PS: it’s why the rallies are so intense on the upside as many managers must close out these “hedges” by buying stock.
Cash allocations are high and recently got larger.
This past week, while there were healthy inflows to equities ($9.7 billion), cash additions amounted to $14.5 billion and $12.2 billion left bonds. Typically, when $ leaves bonds it goes into stocks as they would normally be more attractive. However, with both stock and bonds out of favor, more assets are accumulating in cash.
With inflation remaining persistently high and risks of a recession growing, stock markets have more room to fall according to Chief Investment Strategist, Michael Hartnett of Banc of America.
If Treasuries were the stock market, this week everyone would have said that the “market” finally capitulated. The following chart on TLT (20-year treasuries) is one very bearish chart. Remember folks, it isn’t JUST that the Federal Reserve is raising their overnight lending rate, they are also liquidating their bond portfolio and the following chart shows you what more sellers than buyers looks like:
Many investors, especially those under the guidance of financial advisors, hold some type of balance between stocks and bonds. As we have stated many times before in past Market Outlooks, historically when stocks go out of favor bonds have rallied and been a cushion or buffer for negative equity returns. Please note that most of us (if not all) have been investing in an environment where interest rates have been falling for the better part of 40 years. Thus, they served as a “safe haven” for the part of the portfolio that wasn’t in risk assets (equities). Not so in 2022. See chart below:
As we stated before, this is the worst 60/40 portfolio performance since the 1930s.
One last point about stocks under pressure. The housing market is getting crushed at the moment (more on this in next week’s Market Outlook) and typically until such time the housing market bottoms out, stocks keep going down. See chart below: (the black line is the S&P 500 and the orange line the NAHB-National Association Home Builders) Notice 2008/2009. Stocks usually bottom when/right before the NAHB bottoms.
Better News: Seasonality and the Midterms
There are a few glimmers of hope. First, the Dow Jones has been up the past 3 weeks. That is infusing some positive momentum into the large cap leadership that often precedes upward major market moves. (Our risk gauges have improved. More on that in the Big View section below)
Two, earnings have been coming in a little above expectation. According to FactSet, 20% of S&P 500 companies have reported their Q3 2022 results with 72% so far beating their earnings expectations and 70% reporting above estimates. This is a positive for the market. What we need to be aware of however, is the guidance many of these companies are delivering about the next couple of quarters.
Seasonality is right on target so far, whereby the September-October sell off occurred similar to past seasons and now the stock market has the propensity to move higher. Please note: the difference this time may be that we DO NOT have an accommodating Federal Reserve. That may dampen or change some of the seasonal influences. See the historical chart below:
As I am sure you are aware, there is an upcoming Midterm election taking place in November. There may be continued volatility in the markets as analysts, polls and political pundits try and figure out which party rules Congress and the Senate. Much of the jawboning will be about what will happen to the White House agenda based on which party remains or becomes in control.
However, the period after Midterms has typically been a favorable time to invest in the stock market. We would caution you (again) from becoming too enthusiastic about this statistic. We are in an economically challenging period with over 90% of corporate CEO’s now predicting we are or will be going into a recession.
How to Handle Your Investment Portfolio
Here are a few continued suggestions on how to handle this volatile and potentially risky period of investing.
This week’s market highlights from our Big View service:
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