Recap

It's time to look back over your humble blogger's calls this year so far. For what it's worth, I'm happy with the way things have gone. Here are the highlights:

Risk Model:

- Stayed mostly bullish, caught Feb correction, and got back in during critical March-May rally, now signaling a sell.

Good calls:

- Rise in 10yr rates in January, pause in May

- Growth/Value rotation

- Copper market rally (both Jan and May), Lumber sell-off

- Financials outperform Tech

- Bitcoin 'Musk SNL' top

- $VWAGY, $F > $TSLA

Not so good calls:

- Too much cash looking, for a bigger correction

- Missed the oil trade

So far so good, but as my pal Mike Wilson used to say "thank you for doing your job!"

It's hard to be right all the time, so I just don't worry about the bad or missed calls. Besides, this job pays lousy so I'm not gonna sweat it.

Now it's on to the second half.

The battle between growth and value continues to rage on. The repeated series of rotational moves are confounding the vast majority of market players as alpha is getting harder to find, let alone hold on to.

This chart demonstrates the back and forth battle now playing out. It has served to prevent a correction so far this year, but the market is getting internally weaker with every gyration. The whipsaw action is almost impossible to forecast. But still, I try. Right now I'm looking towards re-entering the value trade again after this recent correction.

Growth vs Value ETF Relative Performance

There is less conviction as we make new highs. Both volumes going into rising stocks and the percent of stocks above their 50 day moving average are not confirming the move here. The odds of a serious correction are rising. Less participation means trouble normally.

S&P 500, Chaikin Money Flow, %of Stocks Above 50 dma

Thanks to the Fed, there has been ample cash in the banking system with these excess deposits earning next to nothing. The capital repatriation plans of the banks have now been revealed and the dividend bumps are starting to happen. This reduction in reserves will lead to a rise in the short-term money market yields, and that is to the detriment of the financial conditions measures. The flatter yield curve that will result has been the main culprit in the most recent value to growth re-rotation. This, combined with the threat of the Delta variant Covid surge, the smooth path to a successful reflationary environment is now being threatened. Banks, in the short term, are a 'sell on news'.

The reality check now being given to the inflation hawks is evident in the sticky behaviour of the 10-year bond yield. It must be frustrating to be a bond vigilante. Seeing inflation prints and budget deficits this large, and not getting a reaction in the treasury yield is the ultimate in cognitive dissonance. But the market often does the most to make people wrong in the short term. After a 40-year bull market, there aren't many bond vigilantes left managing money. Being a dyed-in-the-wool stock guy, I don't have much use for bonds. But pension funds, banks, life insurers, and most importantly, central bankers still keep buying 'em.

Will the turning of the page in our calendar be a signal to go back to the 'value' trade once again? The 'small cap' and 'emerging market' trades have similarly unwound after a promising start to the year. The last week has seen a classic 'window dress' finish to the first half with the growth sector getting inflows.

It seems a 'stumble out of the gate' start to Q3 is in the cards. But I have made that call a couple of times already and been frustrated. This is why 'market timers' are an extinct species. But this dinosaur, for one, keeps on trying. I'm sitting on some cash here. As I see it, earning nothing beats losing 5-7%.

Risk Model: 1/5 - Risk Off

An overbought market, with declining bullish sentiment and a suddenly decelerating economic growth outlook, doesn't warm my investor heart much. Only moribund volatility helps the model from being fully negative. A high 'skew' in the options index market is indicative of the rising level of fear. Skew is the 'price' of hedging tail risk. It tells me that people are getting nervous about this market. Maybe they're right this time. Maybe.

SKEW Index