The good news? November
was less wild than October. The bad news? December started the rollercoaster
all over again!
The usual
suspects, FAANG, were leading the pack once again, showing declines larger than
20% from their all-time high.
The scary thing
is that this might just be the beginning. Comparing the market capitalization
of the FAANG stocks to the market capitalization of the tech stocks during the
dot com era as a percentage of the total US stock market, you see that FAANG is
off their highs, but if they would follow the same path as tech stocks during
the dot com bubble, we have a lot more pain ahead.
Looking at the
number of occurrences when the Dow Jones index had an intra-month decline of
more than 8%, and a closing of the month that was at least 4% lower than the
month before, it finds itself in bad company. It took place twice this year and
before that, *drum rolls* in 2008 and 2000. This pattern basically takes place
every time a market peak is set, and I fear that this time it`s not different.
Whichever way
you look at it, things are overvalued and highly irrational. The following
chart gives a different perspective, this time in the form of the number of occurrences
when the Dow Jones closed at a 52-week high, while less than 50% of the stocks
are above their 200-day average. This means that only a select group of
companies carry the stock markets to new all-time highs. For a solid stock
market to take place, we normally see a broad participation, where the “high
tide lifts all boats”. At this stage of the cycle, that`s definitely not the
case.
Below is an
interesting table about the duration of all drops of 10% or more, from an all-time
high. You can see that it can take a while for a bear market to happen,
although it definitely happens at a faster pace than bull markets. To go from
-10% to -20% can take up to 1.5 years, or 18 months. If you`re a bear, that`s
only about a 7% yearly return.
My suggestion is
to not fall in love with your position, but instead to “whack a mole”; keep a
“fixed” number of shorts on the index. Use a flexible number of shorts to enter
the market for a short period of time after a heavy “short squeeze” and exit
after a 3-4% profit. This way your “fixed shorts” will benefit from the long-term
decline, while the “flexible shorts” will benefit from the highly volatile
environment.
Of course,
that`s easier said than done and with short squeezes being as large as a 10%
increase in a day, not many traders will be able to survive it.
So how bad are
the markets right now? Is there any way to earn money anymore, in any type of
asset class? The simple answer is no. The number of asset classes that show
increases of more than 5% per year, is zero this year. The median asset returns
are now -1.69% for the year, with the maximum being a meagre 2.43%.
Looking more
closely at stock market returns, you would probably be shocked to find out that
total returns of the S&P 500 between 2-9% are actually quite rare, and 60%
of the time you will find that 10%+ returns are the norm. When you see this
chart, you might have the wrong impression that positive returns happen way
more often than negative returns. Do keep in mind though, that it only takes
one 50% decline, to erase 200% of profits…
Here are two
charts that make you think, “hey, why don`t I just go long pre-market and after
hours, in January, March, April, July, October, November and December?” And
honestly, I wouldn`t blame you. It seems like going long pre-market/after hours
and avoiding the slowest months of the year has been a winning combination for
decades, and doesn`t look like it`s going to change anytime soon. (Not taking
any broker fees into consideration).
The first chart makes me wonder; is this the best visualization of the “capital flight to the East” that we`ve seen over the past decades, where Asia is getting richer (those markets are open during pre-market/after hours) while the US is gradually losing its power?
The first chart makes me wonder; is this the best visualization of the “capital flight to the East” that we`ve seen over the past decades, where Asia is getting richer (those markets are open during pre-market/after hours) while the US is gradually losing its power?
I`ll finish this
chapter with a funny visualization of what it takes to be a good
trader/investor. It`s all about the poker face. Don`t celebrate when you`re up,
don`t stress when you`re down. Just stay humble and take the market day by day.
One of the funny things about the
stock market is that every time one person buys, another sells, and both think
they are astute.
- William Feather -
The information contained in this publication is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. The opinions expressed in this publication is that of the publisher and is subject to change without notice. The information in this publication may become outdated and there is no obligation to update any such information.