We are Not Crashing, It's Just Volatile
Memo: The Current Market Cycle and Proof We Are Bottoming
Listening to sentiment alone would lead investors to believe we are 50% down on the S&P 500 and we have another 50% to go. But, this simply is not true. When benchmarking the markets recent price action by sector, this bear market, on a technical basis, has the hall marks of every market bottom since 2000.
Recollecting Howard Marks book, “Mastering the Market Cycle”, there was a particular part that was of importance. Although I cannot recall the exact part of the book, the lesson learned was all the same. That lesson was how it is important for investors to know less about the exact moment markets see their major low/top, but to know where they are in the market cycle.
This is true in identifying market tops just as it is to identifying market bottoms. If you can get in the “general area” of tops and bottoms, gains will be protected and losses will be minimized in both instances. Obviously, hindsight in 2021 has me questioning many of the decisions I made near the market top. Although I knew we were coming to the end of a market cycle, I did not raise capital because consensus narrative was, “you can’t time markets”, “these companies (like Cloudflare) deserve to be trading at 100x P/S”, “it’s best to just buy and hold”.
All of these investors that said these things are gone now, replaced by macro traders and commentary. There has been a new type of investor/trader that has emerged the past couple months. Looking back, I even repeated a lot of the same market commentary. Perhaps in the age of innovation, it was really different this time? But history is often a teacher of repeated lessons. It’s never different this time, ever, and it’s just a market cycle.
The bear market we are in today is just that, a cycle.
Sectors to Pay Attention to
This market cycle is unique, today, when it comes to the credit markets. Historically, bonds have acted as a “risk off” proxy even in inflationary periods. This has been unfortunate and has strained the financial system but we cannot look here to identify where bottoms are when it comes to “risk off” because the market bifurcation is glaringly obvious when taking an unbiased approach.
Back in 2001 and in 2008, growth stocks, consumer discretionary and technology stocks bottomed months/years before the major indices did. Once this bottom formed, a vast majority of the selling had already occurred and many individual stocks traded along a bottom until the major indices finally found their low. A few examples I can pull up are Amazon and Apples stock in 2000 & 2001, as well as XLK (technology index) in 2008.
2000 - 2002
NASDAQ During the Implosion of the Bubble
Apple Bottomed 1 1/2 Years Prior
Amazon Bottomed 1 Year Prior
S&P 500 Told an Entirely Different Story at the End of the Bear Market
2008 - 2009 GFC
NASDAQ During 2008 GFC
XLK - The Technology Index
Apple During 2008 - 2009
S&P 500 - The Last Leg Down, No Where Near the Low in November
Today’s Price Action is Similar to These Market Bottoms
There are more index’s to pay attention to today. Of particular interest in this case is:
ARKK Innovation (technology) ETF
XLY (Consumer Discretionary)
NASDAQ
S&P 500
We will find that growth stocks and consumer discretionary has been incredibly resilient even in the face of tremendous volatility.
S&P 500 Recently Made a New Low
NASDAQ Still Haven’t Under Cut June Lows
XLY - Consumer Discretionary Forming a Higher Low, not Even Thinking of the S&P
ARKK Innovation Carving out a Bottom
Snowflake, GitLab, and ZScaler Not Even Thinking About New Lows
What We Can Determine
The markets are bottoming here despite sentiment’s narrative. I recently gave my macro thesis here:
Price action beneath the markets are also signaling that we are at/near, or at the very least, crawling along a bottom. Obviously pending any sort of black swan news, this is likely the point of maximum opportunity for investors.
Stay Tuned, Stay Classy
Dillon
Agree with you long term and lots of sales are indeed coming, but believe we are going lower and risk assets get repriced further once negative wealth effect and higher interest rates for longer start getting priced not only into valuations but earnings when they affect aggregate demand more. June lows to Aug rally was clearly a bull trap, now many people are calling for "return to normal".
So brave to fight the Fed and a prolonged tightening cycle! I don't want to fight the Fed lol until they pivot.
Agree. Tks.