Sentiment is far more influential than people think within the markets. To gauge sentiment, it’s more of a “pulse” on the markets rather than driven by data in most events. Until recently, it’s been very obvious that there seems to be this consensus that the world is going to fall apart and everything is going to zero (not really, more figuratively).
From the Tweets I read and YouTubers I watch to the SubStacks I subscribe to, it’s nearly all doom and gloom. Which, brings me to my point, I have a difficult time aligning with consensus on a long term (6-9 month) view. It’s not necessarily being a contrarian for the sake of being a contrarian but it’s knowing how leverage works and how the internal market works.
The markets are positioned to bounce upward, which could be a “lower high”. For those familiar with technical analysis, this “lower high” is a very bullish pattern and can signal a major low in a bear market. This is positioning us for an ongoing rally, if and only if inflation has truly peaked.
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Markets are Set to Bounce, Forming a Higher Low
Today, there are three main reasons why I think we are ready to move upward which can be both an opportunity or a risk. Depending on which side of the trade you are.
Sentiment is too extreme and too bearish
Technicals justify a lower high
Inflation is showing signs of peaking, for real this time
In my last Portfolio Update, I provided my hedging strategy which is still on the table. All key data points and moving averages are still in play. The trend is down, plain and simple. In the event that inflation isn’t peaking and Jerome Powell keeps the breaks on for an extended period of time, shorting the market is the way to go but risk must be controlled.
On the more bullish side of the equation, we must still be aware, methodical and thoughtful about how we position ourselves and where the short thesis can go wrong. This memo is designed to provide a different opinion away from consensus. As Robert Kiyosaki’s Rich Dad once said, “There are three sides to every coin. Heads, Tails, and in Between. Investors should be aware of all three.”
Sentiment is a Strange Data Point but Powerful
The first data point is arguably the most powerful and one that makes me question my short thesis all together, the most.
I logged in to Twitter after a nice relaxing weekend with my Wife and family, all seemed right in the world. However, in the social media (Twitter) universe, it was pure devastation, doom and gloom, Europe is screwed, everything is going to zero, the markets are going to collapse, I am short everything. At first, I was slightly confused and a little bothered by how disconnected the meta verse is from reality. My world seems fine but Twitters world seemed to be in chaos, interesting.
Then, I logged in to YouTube only to see a similar story. I watched a few and heard the same story around “The Fed”, “Doom and Gloom” and “Europe is going to freeze”. The SubStacks I am subscribed to showed a comparable narrative where it was heavily advising against buying the dip. Instantly, I question what I just posted about my short thesis. It seemed to obvious and everybody else was aware of what I was talking about? By the way, I bought the most this week than I have in the past 2 months.
Published Date: November 10th, 2021
Part of what made the SubStack above so important and impactful for the investors who read it is that it went against consensus. Everybody and their mother (literally I saw Mom’s on Twitter spaces talking about DogeCoin) was leveraged long. Investors were talking about how rich they were getting, the latest shit-coin was going to the moon and, let’s not talk about AMC. That was an interesting time. Consensus was euphoric and positioned that way.
Fast forward to today and it’s the complete opposite. The NASDAQ is down nearly 30% from the time of writing that article (above) and sentiment is in the gutter. It has become obvious that the real, profitable, opportunity to short has came and went. Everybody knows what has happened now.
We must now ask ourselves, what next?
We are OverSold on a Short Term Basis and On a Weekly Basis, We are Still in an Up Trend
On a weekly basis, as far as the NASDAQ is concerned, we are still in a bullish up trend. We bounced off the 200 week moving average fulfilling the reversion to mean and are still showing a positive up trend in the MACD and weekly price action.
It wasn’t necessarily the weekly chart that concerned me when knowing we needed to pull back, it was the daily chart. Market’s never go straight up, they can’t and it’s not healthy. When markets do go straight upward, they seem to pull back to mean and future returns are mitigated. On a daily basis, we were over bought but now we have become oversold as indicated by the RSI. In addition, we are in structural support as we are testing previous lows and previous higher lows. It seems like the perfect opportunity to bounce here.
It would be very surprising to see the NASDAQ retest the 200 week moving average on over sold conditions. The market, at the very least, needs to trade sideways for awhile before it’s prepared to break major area’s of support.
When combining both the data points this seems like the perfect area for a bounce to the upside which can form a major low in the markets. If we combine this data with the up coming macro data, it creates a perfect opportunity for a higher, up trending, market.
Inflation is Coming Down
A major component to headline inflation was energy and for some reason, the price of crude oil keeps coming down. From a headline perspective, this could fuel MoM (month over month) DEFLATION. I don’t try to figure out why, I let the price action tell me what is when it comes to macro data.
I am not going to make any predictions about inflation but a few observations I have made recently:
Prices do appear to be stabilizing (at the very least) or going down (in some cases) in restaurants, with airline fares, or general every day items.
The price at the pump has been consistently going down since the June peak
Housing IS in decline, which will further put pressure on commodities and overall economic activity. A few agents I talk to have now called this a “buyers market”, just a few months ago they called it a “sellers market” and that “there was no inventory”. Silly agents, it’s never different this time. This will put pressure on rent prices.
More or less, despite Jerome Powell coming out killing inflation expectations (which was necessary), the data is too much to ignore. The leading indicators are in plain sight and deflation or inflation stabilization is there.
On a Macro scale, another factor that can act as a headwind for inflation is that the war in Ukraine may be halted or put on pause during the winter months. From a strategic military perspective, fighting during the winter months in Russia/Ukraine is not ideal for invaders as it heavily favors defenders. From a historical perspective, perhaps the biggest military mistake Germany made during WWII was that they became too confident and continued to advance into Russia during the dead of the Russian winter. These winter months were the turning point in the war and the German war machine crumbled shortly after.
The point here is that both lagging and leading data is suggesting that deflation is on the horizon, which will be welcomed by markets and central banks. This is positioning us for a strong close to the year in what will be the worst year since 2008.
I’ll Part With This
We don’t know what we don’t know. It is confusing that Twitter and many personalities on Twitter continually try to make predictions with trend/consensus. By the time consensus has figured it out, the trade has already came and went.
Now, Wall Street and the PhD traders at Goldman Sach’s (with their limitless access to data) are positioning their portfolio’s for what comes next. Individual investors who continue to believe that the trend will continue, without proper risk management, will get left behind.
In my opinion, today is a blessing and a buying opportunity for your favorite investments for the next 10 year but opportunistic hedging/shorting is still in play. Volatility is here to stay, for now, but volatility is an opportunity for the intelligent investor/trader, not a risk.
Until this Weekend, Stay Tuned, Stay Classy
Dillon