Hi iFlip Investors
Here we are in late August 2021, and the market continues to march higher with minor corrections only for the market to buy them up. Markets have a way of becoming complacent. They will ignore fiscal, monetary, and geopolitical challenges for much longer than can ever be thought possible. This is why people say you “can’t time the market.” It’s “impossible” to know “when” or even “if” the market will ever price itself lower. Professionals tell you to “diversify” and stay in for the “long-run.”
We’ve all these phrases before. We have all been programmed to think this way over time. The problem is the “long-run” is different for all of us. We all generally underperform over time if we follow an advisor or mutual fund. The issue is that this indoctrinated “mantra” we are told, makes us willing to throw common sense out the window. Many of us will say that the market is so unpredictable; we can never understand it. So we should buy it. Common sense doesn’t apply.
On the contrary, I say common sense ALWAYS applies.
I base my decisions mainly on the mathematics of rules and comparisons of relative values. Currently, the mathematics and outputs of the A.I. & algorithms have swung lower. i.e. the stats associated with the buy signals on stocks have been weighed out by the sell (go flat) signals. Of course, this isn’t something built into all A.I.s, but it is in ours.
Thus, I feel this market rally is near an end. In the week ahead, my personal opinion would be to sell equities to at least a 50% cash position and wait out September October. Even though Smartfolios can do this for you – I feel it fair to offer a sell signal to those who read this market letter which represents nothing more than my opinion.
To be clear, this opinion is just my own. I have made my career using mathematics, A.I. to position investment portfolios accordingly as a function of market risk. At this time, I feel the market risks, especially now, are much higher than any further upside of the stocks we follow across the board. When I was a risk manager, periodically, my bosses came to me and told me that market risk far outweighed systemic risks. Regardless of my math or opinion, they would sell customer’s stock investments. Again, iFlip’s A.I. can and does manage this for you. I reiterate my own opinion that raising cash NOW is prudent. I will move my own personal portfolios to a 50% cash position in the short term. I would feel remiss if I didn’t tell this community.
The following indicators have led me to this conclusion.
1. The iFlip A.I. models are oscillating – buying and selling the same stock frequently.
2. A.I. observation: I notice the A.I. having less “clustering.” i.e. declining “Sharpe/reward to risk” ratios across different variations of the models built by A.I.
3. Divergences of volume to price increase – The price is going higher on lower and lower volume (See S&P 500 chart below)
4. The market high – It is unprecedented for the SP500 to increase 86% in 18 months. Without a single correction of more than >10%.
5. Fibonacci retracement – The market has blown through all Fibonacci retracements without one point of resistance since the March 2020 covid low.
6. Correction looming – There have been two corrections of magnitude precisely six months apart – last September and October and last March 2021. This looks like a possible cycle high and we are at the beginning of our 3rd cycle.
7. Risky months ahead – September & October are always the most volatile months of any fiscal calendar. Given the current price level the probability that the volatility will be directionally down.
8. Geopolitical risks are higher – The S&P500 is trading higher on bad news. Many can see this as a strength, but it also shows denial on the emotional level and divergences on the data level.
9. Inflationary risks exist (inflation is sticky) – Price increases in commodities are sticky (slow to go down), unlike stock prices which are quick to go down.
10. Covid Delta & Supply Chain – Supply chain pinches and the resurgence of covid delta imply that inflation will be here to stay a longer length of time, offsetting yet further stimulus via the infrastructure bill yet to come.
11. Taxes are coming – Tax breaks had a lot to do with this rally, and so has the stimulus.
12. Talking heads are all bullish – the agents on business talk shows are unhedged. Some of them will show caution but fail to make a call for fear of being wrong.
13. Naked traders dominate – I’m talking about traders who buy because of the FOMO effect, not fundamentals or market data analysis.
I could go on…I JUST DON’T LIKE IT!
In my years of starting iFlip I have never made such an assumptive call. The idea of being invested is to make money, after all. Sure, cash will make nothing out of the market right now, but there is also no risk in you losing it. Currently, the probability of losses in the months ahead seems high. We can re-examine the market later this year and may rush back in if any meaningful correction occurs. Mind, I may be wrong; but I feel dutiful to stress my opinion at this time.
This newsletter is about my opinion this week. I’ll be writing more often over September and October to keep users updated. So stay tuned in the future.