Naughty & Nice

Hey Tuesat11 fans, it's time to review the past year's opinions that have been foisted upon an unsuspecting blogosphere by yours truly.

And as is customary, I will be brutal with myself in an effort to bring a little honesty into a world that is missing that quality, given the constant barrage of Trumpian revisionistic rants and Trudeaudian pollyannish pressers.

But I digress. This is, after all, about the stock market, not politics. Markets are hard enough to forecast. I don't envy the Sunday morning news talking heads, trying to decipher the actions of our feckless politicians, from both ends of the spectrum.

How about that year, eh? How could something so small as a virus make such a mess of virtually everything? And when the year started, we thought all we had left to worry about was Brexit.

Let's review the record:

I began the year looking for a sell-off after the euphoria of the China trade deal had pushed up growth expectations too far, in my view. January's words of caution were just a prelude to a series of events that eventually rocked the financial world. In February, as lower bond yields helped Growth stocks to new highs, I warned of the "Death Zone" where the markets were dangerously "out of gas". It was mid-February when the Risk Model gave a corroborating sell signal.

Completely cashed-up as I was, there was no way I saw the March meltdown coming. But better lucky than good, I guess. In "Pushing on a Strain" (could be my fav title of the year!) I warned that the Fed was behind the curve. Thankfully they weren't for long, quickly avowing full support for the financial system. The next week saw me predict in "Fla-La Land" that Americans would be reluctant to shut down due to their aversion to government edict - "social distancing = socialism!" That sentiment still persists, despite U.S. percapita Covid rates being 3X the World average.

They say the hardest part of market timing is knowing when to buy. Drum roll, please.

In my March 24th blog entitled "My Favourite Martian", I stated unequivocally "Buy this market with both hands".

With the risk model stuck at '0', I went against it and called the bottom. Using "gut-feel" and armed with the experience of 40 years of seeing past panic lows, I argued that, like 2009, the worst was priced in. Predicting a fair trading range of 2400 - 3200 I said "it would be a slow, bifurcated recovery, but some stocks had seen their lows. But my selection was mixed as I said to focus on quality with Utilities, Financials and Technology stocks fitting the bill. The Banks took a bit of work before that bet eventually paid off. Little did I know that Tech would soar so high!

As April saw a chorus of commentators ( including two of my favs - Dywer and El Erian) arguing for a retest of the lows, I posited the fast recovery was like the World War II era, specifically in 1942. The war against Covid was far from over but the monetary conditions supported a "V" shaped recovery for stock prices, if not for the economy. The stimulus was so excessive, I argued, that a retest may not occur. I also mentioned gold. I should have also said BITCOIN and ZOOM. This was my biggest failure of the year; leaning against the tidal wave of newly minted stock jockeys armed with phone apps linked to their Robinhood accounts. Being an older guy, I guess I was too risk-averse and forgot my favourite mantra: "never confuse a bull market with brains". I still made money but underperformed the market by being too cautious.

By late May the Risk Model had finally kicked into buy territory as the copper market started to respond to the successful reflation efforts, especially in China. I maintained the view that markets were supported by monetary factors while becoming convinced that only a successful vaccine supported economic recovery would create the much-ballyhooed 'rotation" trade. The July-August Mega-cap rally seemed to be running out of steam and I correctly recommended that EEM and Small Cap stocks looked ready to run.

August's 25th piece "Thought Bubble" saw my call to finally go 'all-in' on the rotation trade - maybe a bit early, but I was ready for the pre-election turbulence by also predicting a choppy September correction. The Risk Model had started to also show signs of it, dropping to the '2' range in mid-August.

I called for a volatility break-out in mid-September, but also kept the faith in the positive post-election scenario that I believed would follow. On October 20, I finally called for another "all in" trade the week before the U.S. election, observing that the value-growth rotation trade was "coiling like a spring".

Short-termism has always been my Achilles Heel and early November saw me call for a pause in the rally due to my fears of an economic slowdown due to rapidly expanding COVID caseloads. The market - of course doing the thing that makes the most people wrong - took this as a sign to revisit the Growth trade, and pushed TSLA, the IPO markets and BITCOIN to new highs. I didn't see that coming and got stung on a few shorts.

In my latest two pieces, "Silent Night" and "WAM SCAM" I have laid out the post-COVID risk of a resurgence of inflation and its effect on bond yields. The markets are unfazed by this at present due to their cognitive dissonance between the slowing economy and the positive vaccine roll-out news. And given the year-end dynamic tensions of a TSLA rebalance and the usual tax/window dressing trades, a low volume market truce has developed, pinning the market near their all-time highs.

January, with just the turning of a page in the calendar, should usher in a dose of market cleansing volatility. Markets, like Nature, abhors a vacuum. I'm mostly on the sidelines - short a few commodity stocks as the economy chills with the weather. Spec positions are elevated and there is no shortage of $50 oil.

So all-in-all, not a bad year for your humble (is this term appropriate given the above?) blogger in navigating the 2020 market. Can at least claim that I stuck to what I know best, didn't get over my skis and stayed in my lane! My macro-oriented style has actually been a good place to be this past year in this 'rally of everything' market.

As we enter a transition phase in which the economy does better than the market, I don't think next year will be nearly as easy. Good news will be bad news at some point this year - probably during the traditional May-September corrective seasonality period. Most calls are using the "Have your cake..." school of forecasting in which they have higher earnings with persistent low yields and high PE multiples.

It don't work that way, bro.

Better economy + better earnings = higher yields and therefore less monetary support. The correction will come out of the blue for most people who think they are one and the same. As my old friend, Pat Taylor. always said: "What does the stock market have to do with the economy ...NOTHING!!"

But I will buy that dip, believing that the bull market will have many years to run. We will see if this is naughty or nice in due time. Meantime I'm neutral to this market.

In the months ahead, I will have lots of things to say, and some of them might actually be of use. I enjoy the weekly battle of wits with the markets and hope this weekly 5-minute read is helpful. If it has been, let me know what you think and what you are doing in the market as well. I think we would both benefit.

deck@tuesat11.com

Risk Model: 4/5 - Risk On

Unsurprisingly, given the support of lower yields, the model continues to stay bullish. We are seeing a time-based correction, as the post-election euphoria subsidies and the COVID case-count news is offset by the vaccine deployment, in terms of investor risk appetite. I can't see what can change this construct, so be prepared for anything over the next few months! If yesterday's "mutation scare" can be so easily shrugged off, you have to leave a high volatility melt-up scenario on the table for January. Straddles anyone?