Big picture strategy

Today’s blog is one of those writeups that I deem to be more important for you to read than others. It’s a bit longer, but it is packed with very useful charts outlining an argument for a tougher market environment ahead. Most importantly – I provide a solution to this situation via a list of sectors and strategies for you to consider in your portfolio.

To start:

As an industry professional, I follow small & large (institutional)  investors by subscribing to data analytics like sentimentrader.com (the cheapest way of doing it), BearTraps, Rosenberg Research (both generally too expensive for individual investors), and others. Many of the charts below are courtesy of these resources. If you are an individual investor, there are free resources such as the CNN Fear/Greed index, and AAII Sentiment index. Some of the technical indicators available on most charting packages also look at sentiment (eg: VIX, Put/Call, etc). These tools, and more, are described in my book Smart Money/ Dumb Money. Whatever the case, I am posting only some of the sentiment charts that are currently scaring me.

When all the experts and forecasts agree — something else is going to happen. Bob Farrell

What’s Dumb Money Doing?

One of the most reliable indicators of retail/individual small investor movement is the asset flow into investment “products”. While I still track mutual fund flow as a way of tracking retail investors – the more popular  tool for small investors these days is the ETF. ETFGI is an independent ETF tracking service. Their most recent report  showed that the ETF industry surpassed another landmark moment recently. Assets invested in ETFs have now topped $12.25T as of the end of February. On a YTD basis, this space has attracted a net influx of $253.04B! Dumb Money loves this market!

Too few bears out there, according to the AAI Bear Survey of retail investors.

 

You know I’ve got to post a Smart/Dumb confidence spread chart today! This pits the Smarties against the Dummies. The ratio shows us the Dummies are in control. My arrows show what happens when they rule the roost.

What about Wall Street & Bay Street?

Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria. John Templeton

Recall that brokerage firms (sell side research) are all about selling you something. Investment products & funds, new issues, whatever. Stay invested. Always. That attitude worked to drive markets up to historic valuations when investors had plenty of excess savings after COVID. Seems that those savings won’t be a factor now…

Here’s a chart of Investment Managers commitment. Note that Wall & Bay Street have high exposure to stocks leading into market corrections. Note where the index was prior to the 2008/9 crash, the 2015 correction, and the 2022 bear market. Seems that they’re back into the market with both feet once again…

Here’s a chart of brokerage economists views of the economy predicting soft landings. Note the optimism for soft landings in 1999 and 2007 before the major recessions/ market crashes (grey areas). Note that optimism for a soft landing is EVEN HIGHER than past hard landings. Um…hello, McFly?

What’s Smart Money Doing?

Bond traders are known to be more savvy about the economy than, ironically, government finance people. That’s because governments, especially those with Marxist characteristics (Biden, Trudeau) tend to pushing a less fiscally prudent agenda.

The yield curve pits short (2 yr) bonds against long (10 yr) bonds. Logically, long bonds should have higher yields due to the greater commitment. When short rates move higher than long rates, (inverted yield curve) it reflects bond investors’ expectations for a decline in longer-term interest rates, typically associated with recessions. That’s what the smart money is signaling right now. Hard landing for the economy, typically coinciding with stock market corrections.

So, what is smart money buying & selling right now?

Institutions are SELLING US markets. specifically the overbought Tech, Consumer Discretionary and Telecom stocks. They’re BUYING Europe, Emerging Markets, Healthcare & Japan. This, while Dumb Money (above) still loves the tech-driven US space.

Note also that they are moving INTO energy – the long forgotten sector. More on that in a minute…

Stagflation

You guys know that, way back in 2021 while everyone was believing the BS spewed by our friends Joe & Justin that inflation would be “transitional”–I was calling for the opposite. Then…in 2022, I began noting that I strongly expected CPI to come down but NOT TO 2% per the Fed/BOC goal. Stagflation.

I have long held that energy would be a key driver towards inflation staying closer to 3% than 2%.

Energy affects ALL other aspects of CPI (transportation, cost of production, home heating/ rent–etc). See my argument for the advancing need of energy due to AI and data storage here. Our pal Justin is placing a huge cost on oil & gas tax – well before we’ve developed enough replacements to ease that pain. No matter what type of energy you are talking about – demand is rising exponentially, supply is limited. That will push inflation to stay higher for longer.

Smart money in Canada

I want to choose my words carefully here because I want to be supportive of Canada. I’m a big believer in its potential…when you look at the per capita of Canada 37 million people and you look at the natural resources the country has per capita, it’s one o the richest countries on Earth run by complete idiots. There’s no other way to put it. You might as well tell the truth. It’s so important that Justin Trudeau be thanked for his service and then removed from office. Kevin O’Leary

If you believe that the data pointing towards a recession makes sense, yet there are enough inflationary factors to keep CPI higher than 2% (STAGFLATION)…. consider owning:

  • Bonds or bond ETF’s
  • Staples
  • Energy producer stocks or energy ETF’s
  • The best Canadian dividend aristocrat ETF’s or stocks
  • Diversify outside of NA!
  • Emerging Market ETF’s, European & developed market ADR’s (American Depository Receipts).

The future is not likely to remain what it used to be, as they say. This means active management. Learn to trade with my Online Course, or contact ValueTrend to learn how we can manage your money for you.

The times, they are a changin’ Bob Dylan

 

6 Comments

  • O’Leary does seem like a smart guy in Finance & Business. Just don’t get in a boat with him!

    Reply
    • Yes, he apparently drives a boat like Chrystia Freeland drives a car (at 142 kph)

      Reply
  • Recently you talked about a break out in gold as well as materials represented by ZMT. How does this jive with the smart money moving out of materials. Is the dumb money chasing gold and materials higher?

    Reply
    • Highly observant of you Brian. I noticed this too, and it conflicted with my sector rotation model as noted in a prior blog. The way I am approaching this is that right NOW the materials sector looks good. But we have a warning shot by the smarties that it may not stay that way. I’m in the trade, its done well, but I’m willing to change my mind and sell if it turns down meaningfully.

      Reply
  • I came across an interesting article in the national post that sums up the situation in Canada right now. The final paragraph sums things up nicely

    ” it no longer makes much sense to labour for some profit-generating enterprise that fuels the economy and contributes to prosperity, when you could be safe and secure on the public payroll, protected from plague, pestilence or pandemic. It’s too dangerous. In Canada, real capitalism means working for the government. All the cool kids do.”

    Reply
    • Great quote
      This literally, all jokes aside, is how Marxism works. Make no mistake, the Lib-DP’ers are Marxist borderline Communist in their policies.

      Reply

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