De-Risk Your Portfolio NOW

Summary

  • I post the webinar links in MoSI Webinar Chat each week, but wanted you to really get to YouTube for these and the last several.
  • The stock market is entering an even choppier phase as the summer vacation season starts on top of a Fed that is inching closer to tapering.
  • Large cap valuation are still at all-time extreme highs and many are overbought or nearly overbought, which is quite a double whammy of high valuation + weakening momentum.
  • The S&P 500 is not as overbought as a few weeks ago, so we could see a few weeks of rally here. You need to use it to right size any asset allocation risks.
  • I strongly encourage you to watch the webinars each week. I have worked hard to edit them down. Watch at 1.25 speed to save time and hear my even funnier sounding voice.

In the past few months I have shown various valuation metrics, including the Buffett Indicator. All are near or at all-time highs. Valuation metrics are the core of fundamental analysis.

Today, there are sweet narratives about why low interest rates can keep valuations high a very long time, there were also very sweet narratives about why the dot-com boom wouldn’t bust and the real estate boom wouldn’t crash. 

Review my forecast for 2020: 2020 Outlook: Euphoria To Despair

Here’s a chart from that piece. 

Valuations were nearly stratospheric to start 2020. It made sense to trim into the January Effect, so we did. 

Now the S&P 500 (SPY) (VOO) valuations have, in the retro jargon of the day, gone to the moon! If you are heavy large caps that have not yet corrected, it once again makes sense to trim before the summer vacation season which coincides with closer to the inevitable tapering of Fed QE. 

Large Cap Forward P/E And Peaking Earnings

This is forward earnings since the Great Recession: 

Here are Consumer Staples (XLP), Healthcare (XLV), Communication Services (XLC) and Utilities (XLU):  

Here are Consumer Discretionary (XLY), Financials (XLF), Industrials (XLI), Information Tech (XLK), Materials (XLB) and Real Estate (XLRE).  

Your initial reaction might be “Wow, look at real estate!” I get it, but there’s a reason for why it is offset, it’s called depreciation. I won’t go into a longer discussion here, but the reality is that although the chart is skewed to the eye, real estate is overvalued like all, and I mean all, the others. 

What those charts should say to you is that large caps might not be the place to be. At least not many of them and certainly not a whole index full. 

The Past Year

As the market rallied past a normal bear market rally last summer, I started to become very concerned that things weren’t right. Too much leverage and too many long call options were beginning to swell the markets back to overvalued from fairly valued – that fact is, we never really saw undervalued. 

At that point we were heavily invested in the Van Eck Gold Miners ETF (GDX) which I said to buy and make your top holding at 15-20% of your portfolio. I actually announced the trade while giving an interview with Forex Analytix on March 16th – a classic bottom tick trade. Members had been told the previous week this trade was coming quick. 

We had also been talking about the Invesco QQQ (QQQ), Invesco Solar (TAN) and Ark Innovation (ARKK) before it was cool. Some favorite stocks were Ford (F), AT&T (T) and Nutrien (NTR). I also repeatedly said to buy Bitcoin (BTC-USD) when it was in the dumps in July and August for a single digit percentage of bank savings (and I said sell all profits when it got around $50,000).  

Over last summer and into autumn, I wrote about my concerns and was mocked by the new stock market superstar traders.

If you’ve been with my awhile, you know I’ve been talking about how the traders have become more powerful with QE pouring in since the Repo market bailout in autumn 2019. Their power increased even more when the Fed went QE infinity last spring. 

You will also know I think they remind me a lot of the 1998-99 tech wreck traders, but that this group of yahoos are better on aggregate than the 1999 “this time it’s different crowd.” That’s a key reason I think we have rolling corrections versus a massive sell-off, as well as, a bifurcation in the markets that kills zombies and replaces them with tomorrow’s growth. 

Moving on, in November, I relented a bit after a bad oil trade. I started to buy very selectively again. Our selections since November have been excellent on aggregate, allowing even conservative asset allocations to do well. 

Folks who were with me the entirety of last year should have made between 10-20% owing mainly to being heavy cash by early February and in the gold miners almost perfectly because we were looking for that sell off on margin calls and believed that a huge bull market in gold was in the early innings:

Massive 2020s Gold And Gold Stock Bull Market Is Just Beginning

This year most of you should be up around 10%. I know that because that’s about what my accounts are up despite cash balances regularly in the 30-40% range. That is an excellent risk adjusted return.

If you are up much more than that, then you should really measure your risk tolerance right now and do a deep review of your holdings.

Large cap stocks and the meme stocks of the past year are the riskiest stocks out there. Many have already started to correct. In fact, some, mainly the meme and quarantine stocks are almost done correcting in fact. It’s the old economy, ok Boomer stocks, that haven’t corrected yet. I think many of those will next as the zombie hunts begin.

Perfection Is Impossible

As an intelligent investor you must accept that valuations fall when something triggers that correction. You must also accept that nobody can predict exactly when that will happen. All you can do is remain diligent and manage your asset allocation when valuations and technical signals

I have four times in my career called for big corrections. 1999, 2007, 2015 and 2020. I was 3-0-1 on those.

Only the choppy 2015-16 period didn’t result in a major correction and I think that was only because of cheap oil. Much like the licks to the center of a Tootsie Pop, the world might never know why markets essentially went sideways 2 years in 2015-16.

Weirdly, given the severity of the pandemic, I see a lot of similarities today with the markets of 2015. Overvaluation, slow growth post rebound, hot money cooling, liquidity destined to tighten up and 70-80% of investors still without a clue – and most of the rest still barely past Colonel Mustard in the study with a calculator level. 

There are many things that can trigger a correction in the whole market or a few sectors and industries at a time. I think it is very possible that we see many companies disappoint on earnings or outlooks later this year.

  • Especially companies with heavy debt and slow growth.
  • Especially REITs that face higher capex and/or lower collected rents versus 2019 in 2022.
  • Especially banks that still have to face low interest rates for a long time.
  • Especially anything that’s not growing, does not have a catalyst to unlock value or doesn’t have a great balance sheet.

Companies that don’t have growth, value they can unlock or a great balance sheet are in trouble as the rotations and zombie hunts continue, likely for years.

Again, I suggest examining your asset allocation and your holdings given your risk tolerance, needs, wants, wishes and ability to invest new cash on corrections. (On that note, if you are having a hard time doing financial planning, I am going to make financial planning software Money Guide Pro available for subscribers to my investment letters in mid-June.)

Perfection

Seasonality 

You have heard of “sell in May and go away.” Empirically that’s not quite true anymore. It should really be “sell in June to avoid the summer swoon.” I probably didn’t make that up, but if I did, you read it here first.

About the middle of June, the stock market often starts to slow down. Why? Pretty simple: vacations. Fewer big traders, who actually go to The Hamptons, moving less money. I think the impact will be bigger this year than ever before. That could leave a void in the market to be filled by narratives from the edge of reality.

At the same time, the small traders remain powerful because of QE and a Fed Vice Chairman for Supervision in Randal Quarles who has weakened all oversight of the financial industry leaving it ripe for problems just like George W. Bush’s regulators did.

They are using margin and calls. But now, also puts, as I foreshadowed last autumn. As I said, I think today’s superstar trader wannabes are in fact more sophisticated than 1999. 

Will Young Traders Flip The Option Switch To Cause A Crash?

Here’s what they are doing. 

Margin (alligator jaws): 

Margin Debt Inverted

Options (step cases): 

Interesting the toolkit being employed is it not? Now add in viral narratives from the edge of economics and finance and geopolitics that sound really, really scary. It could get rocky here or there or everywhere or in a box with a fox or with a mouse in a house. 

It’s hard to know what sort of pressure will be applied to markets next, but it seems like there is a clear step case like trend that’s developed. I at least expect volatility to pick up again soon.

With all those option buyers out there, it sure is a good time to be an option seller who can use basic technical signals and understands fundamentals too.

It’s also good for good stock pickers. We need to embrace the volatility. We can keep an eye on our lists and wait for opportunities to come knocking. 

Again, I implore you, manage your risk now. Choose what needs trimming, outright selling and what you can sell covered calls on.

There Are Opportunities 

Yes, volatility is scary sometimes, but it’s also where opportunities lie. We might not get a bucket buying opportunity. We might just have to move along a piece at a time. 

Right now, the pieces of opportunity are mostly in small and midcap growth stocks. There is still a handful of large valuable companies that can unlock value with the right moves (cue Tom Cruise). There’s also still plenty of opportunity with gold miners. And, many SPACs, pre and post deal are trading for cash value. That’s sort of crazy to me.

Your first step, and I think you have a few weeks to do it, is to make sure you are only taking the amount of risk you are comfortable with in the markets I just described. Then, follow along and use the volatility to fill your basket for what is coming: rotations and zombie hunts. 

Webinar Links

I know some of you don’t watch the webinars. I hear not enough time and I like it in writing. Well, I liked it in writing too, but over a decade of having ideas stolen, I pick my spots.

The more templated pieces I’m doing are good updates and easy to use:

  • Stocks of the Week
  • Retirement Income Options
  • Global Trends ETF
  • Swinging For The Fences which I foreshadowed in Monday’s webinar.
  • A macro piece to be named later for Friday’s webinar.

And, I will try to put something like this each week along with something else.

But, the webinars are important. I say things that I want you to combine with what I’m writing. I don’t want to put out articles designed to be echo chamber rah rah look at all the words I know types of pieces I find all over the place from naked investors selling investment letters. And remember, I studied Milton, I know a lot of words, don’t make me use them. 

Watch these from the past couple weeks. Watch again if you can. The recent content has been very important.  

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