A market transition takes time, but being human, most of us are naturally impatient – we don’t like to wait for anything. This is despite what we have all been told, good things happen to those who wait.
Let’s review the US market with an emphasis on the transition phase and then what comes next for both stocks and bonds.
This spring has not been a walk in the park, the US markets are flat despite being at the tail end of the Q1 earnings season; bond yields are declining and the yield curve is flattening. Institutional Investors know the US market is overvalued based on the economic numbers and is unlikely to move higher until the market has some substantially great news. Last year is over and the “gift” in the US market is becoming quickly forgotten because…well we are humans and everyone is impatient and wants return today.
So the US Market transition period is now in its fifth month and the stock market has gone nowhere. But wait, biotechs and small caps have done much poorer than that; in fact they are sitting on their 200day moving average, the Nasdaq is at the 100dma and the Dow and the S&P are at their 50dma. This walk in the park has some members tiptoeing between the tulips to the exit.
When small caps lead, typically the other indices follow in a transition. Sell-side companies including Goldman have been ratcheting down expectations for the US market and yesterday Goldman stated in a CNBC article that investors would have to be tactical in the next few years to achieve return. Since MCS has been tactical since the inception of the firm, let’s talk about what tactical investing is.
Tactical investing is an approach that changes to adjust to current conditions to continue avoiding negative outcomes and maximizing opportunities. It is suitable for bringing about a desired result under the current environment.
Tactical investing allows for considering whether the portfolio is best served by an offensive or defensive approach at any given point in time. Strategic investing will work under certain conditions but can’t continue indefinitely without negative interruptions.
Most investors are strategic oriented only, and therein lies the venerable point. However, a strategic investment approach may be best served when coupled with a tactical approach. Losses will be minimized and profits maximized. In both cases, the investor considers the benefits associated with the risk and acts appropriately. This approach allows for a non-panicked reaction that assists in avoiding poor decisions that can lead to even worse outcomes.
Tactical investing is similar to playing chess; successful chess players are thinking several moves ahead; i.e. if this happens, what will one do to take advantage of the opportunity while minimizing the risk. Currently some global markets are back to where they were 10 or 15 years ago.
Others are slightly higher or slightly lower on a gross, nominal, basis. However, those who employed or supplemented their investment approach with tactical investing are heads and shoulders above the rest of the pack on a net basis.
Since the markets can go three ways at any point in time – up, down or sideways – a prudent investor evaluates all the data prior to putting on a trade. Our evaluation of the bond market shows it is almost there, but not there, yet. Many investors and traders have tried to front run this trade and been burned because it has not materialized – yet.
The 30 year T-bond has declined in yield approximately 55bps in the last 4 months. An additional 15-20 bps would hit the bottom of the channel. The short Treasury trade should occur after the yield hits the bottom and makes the upward turn. Properly placed, this trade should provide a very nice return.
The US markets should also provide attractive opportunities for tactical investors! . The US market is drifting sideways and down and could very well hit an interim bottom between June and August perhaps 10-20% lower. The market is long overdue for a correction, which will happen when it happens – we interpret the data, we don’t predict. As stated in previous blogs, the “tell” is evident.
Prudent investors have been exiting all year, first in biotech’s, momentum stocks, small caps and the Nasdaq; others should follow. Longer term technical analysis shows the market will bounce most likely into the year end. Remember,DO NOT trade from this blog. This is for informational purposes to disclose the MCS analysis and evaluation each day. It contains our thoughts on the present market at this point in time.
DISCLOSURE: Opinions and estimates offered constitute the judgment of MCS and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for accounting, legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.
This article was written by Metropolitan Capital Strategies CEO Sharon Snow and Chief Investment Officer David Schombert.