Don’t Let Long-Term Warnings Cloud The Next Few Quarters

Thanks to all those who attended our quarterly client webinar last night. I love the questions. The more the merrier!

Staying on the theme of what keeps me up at night, as I mentioned, I sleep great when our strategies are struggling. I rarely get concerned having been in the business for 38 years. I do sleep poorly and get concerned when our strategies are making unreasonable amounts of money because I know risk is elevated or high. A reckoning is usually not too far away.

I also reiterated a comment that I have been making with clients. At some point in the next six years, I forecast a stock market decline exceeding 30% that lasts 12-24 months. I don’t see the set up nor the culprit. I just know that we have not seen a decline like that since 2007-2009 and the markets and economy will be due. Recession will likely accompany that bear market, but one does not have to.

I saw this chart on Twitter today. Cash allocations are at historically low levels. That is one ingredient for a bear market. However, this condition can last years before it matters. Margin debt has soared. That’s another ingredient of a bear market. Guess what? That can last years as well. There are other indicators to go along with these like Robert Shiller’s CAPE ratio and Warren Buffet’s total stock market value to GDP. Eventually, they will matter, but they are absolutely terrible timing tools.

The bull market remains old but alive and reasonably healthy. There is a scenario for a 6-11% correction this quarter. A July peak and an August or September bottom. All-time highs in Q4.

The much ballyhooed NASDAQ 100 is below. It’s a familiar chart. I think the index comes down to at least 28,000 in Q3 and then sees 31,000 in Q4. It needs rest. It needs to shake out the late comers.

The Russell 2000 Index of small caps is below. Which looks better to the naked eye?

I would rather own mid and small caps than tech right now where appropriate and possible.

Over the past few days, we have raised some cash, deployed some cash, but overall we have reduced risk in a few non-aggressive portfolios by cutting position size in momentum and high beta (risk) ETFs. I don’t think it’s a “sell everything” moment or quarter. Our models just don’t want the pedal to the metal risk-wise on the non-aggressive side.

I am off to Philly for an overnight that will include a stop at a new cheesesteak purveyor in the burbs. For those who don’t know, I am a Philly cheesesteak addict and aficionado, having visited almost every top 20 seller in the greater Philly area. Jim’s of South Street is my all-time fav. Campos and D’Allessandro’s are almost as amazing. I’ll report back on Friday.

On Monday we bought more QQEW, more IJT, more PG, more SLB, more IGV, more FDN, more OIH, more PINK, more IYR, more BUG and more XBI. We sold DG, SSO, some QQQ, some SPHB, some DWAS, some PLTR, some MQQQ and some JNK . On Tuesday we bought SSO and TQQQ. We sold GDX, EMB and some QLD.