Incompetent people are at a double disadvantage since they are not only incompetent, but unaware of it.
Behavioral Scientist, April 13, 2020
The above quote echos my thoughts towards the current Prime Minister of Canada and quite probably the US President .
The thing I like about truly competent people is that they can make a mistake and LEARN from it, rather than repeat it in the future- as the above politicians seem to struggle with. On the subject of learning from mistakes, long timed hedge fund manager Stan Druckenmiller confessed an error he made when feeling pressured to “be in the market” when everything told him not to be. This is called FOMO (Fear of Missing Out).
Mr. Drukenmiller turned out to be a very honest man who could reflect on past mistakes. In 2010 he wrapped up his hedge fund after 30 years of running it with early success. As markets began to change, he realized his emotions and his analytics were in too much conflict to operate the fund. He told clients that he’s “returning their money and ending his firm’s 30-year run, citing the ‘high emotional toll’ of not performing up to his own expectations.”
Below is a memo he posted in 2015 looking back at those times. It really does mirror the FOMO prevailing in current markets – and how hard it is for ANYONE to stick to their guns in times like this.
But the market keeps rising!
Fear of missing out is the order of the day. But what are we actually missing out on? Below is an illustration of what the S&P 500 and its fabulous rise would actually look like without the FAAANM plus 4 other stocks (list below)
In fact, The S&P is still ugly if we remove the FAAANM stocks–see chart on the right, below.
To carry it further, we are not missing out on too much on the international scene either. The chart on the left (below) illustrates the MSCI ex-the SPX.
S&P 500 is fairly ugly without the fab 7 stocks…
Below is a chart of the Vanguard Growth Index. Note the momentum studies (RSI, etc), note its old highs are almost being touched. Not yet overbought, but very, very close. Relative strength vs the SPX has been huge (second pane from bottom) since the winter. Guess what its holdings are comprised of? Three guesses, the first two don’t count…
Bingo–give the lady in the front row a prize for guessing that its top holdings are…wait for it…(rounded off)…MSFT 10%, AAPL 9%, AMZN 8%, the FB, GOOGL, NFLX, V, etc. filling out the rest. The exact stocks shown in the charts above. Who’d-a-thunk it?!?!
Now lets look at the Value Index from Vanguard. Note the momentum studies are hooking up from an oversold level. MACD is just now crossing over! Comparative strength vs the SPX still sucks.
This index ETF has holding like JNJ, PG, BRK, UHC. Sure, they may be boring stocks, but I guess some of us don’t mind missing out on the excitement of owning something like Amazon with a forward (not trailing!) PE ratio based on current Thomson Reuters data of 130 times. OK. That’d be some good value in that-thar stock!
Conclusion
Mr. Drukenmiller’s lesson hit home with me. We’re avoiding too much exposure to the FAAANMG’s (these acronyms are killing me!) . We have a couple of them but we’re underweight the group. That, plus our cash weighting has caused us to under-perform during the V-rally off of March 23rd lows. But I’m convinced I’d rather own JNJ (we do) or Berkshire (which we do) over something like Amazon with a PE ratio that’s more than twice that of my age. That, and its parabolic stock chart.
The Vanguard Value Index looks ripe as a bullish setup, with its hooking momentum studies, etc. We don’t own that ETF, but we are picking among various “value” stocks here and there. We’re searching for positions that we can sleep at night without worrying too much about. We’re also building some inflation trades into he portfolio.
Oh, and also: Yes, we are in the process of legging in with some of our cash – given the breakout of the 200 day SMA. But we’re still keeping a ton of powder dry. By focusing on value, a little bit of commodity exposure, and holding plenty of cash, we may miss out on the casino-like excitement. But, them’s the breaks when you manage conservatively.
13 Comments
Love the quote- 20 sec pause on TV created by the drama queen himself trying to find his cue cards, my in-laws still love him which brings me to my point- not enough carnage yet- FOMO in place for another 500 points because stupidity is contagious and people just can’t look away from the headlights. TRADERS GAME ONLY right now. I’m out.
Hi Keith,
I can’t find a single pundit who predicted 3115 this soon. Just amazing. In 2008, a single sector caused a domino effect crashing the market. This time, we have bad fallout in at least 3 sectors, if not more, yet the market is pricing as if nothing happenned. We are back to a point last year when none of this happened.
It’s a brutal move for systemic traders, but if you buy here after 3-4 days above the 200 ma, you have the headwind of a historical short-term rally. So chances are it will pullback about 5% and undercut the 200, causing much doubt and annoyance.
What a game!
You got it Matt. Its times like this when I wish I had become a liberal-voting teacher or civil servant, collected the paycheck and feeling entitled to raises in recessions (like the deal they all got recently), and retired with a guaranteed pension after 25 years. Normal job stress, predictable career challenges, certainty of your future.
Anyhow…
This is the ultimate damned if you do/ damned if you don’t moment for traders. We are being quite ginger here. If you don’t get our emailed newsletter – make sure you subscribe–will be sending one out this afternoon that you might find of interest.
Hi Keith,
since savers can’t make much interest on their savings accounts, would they not be eventually forced into the equity market regardless of the economy or fundamentals? There must a ton of cash that people are still holding on the sidelines just waiting to deploy into the market. Do you think that assumption has any merit?
Linsay–you are totally right–please see this blog: https://www.valuetrend.ca/inflection-point/
The doom and gloomers and CNN crowd mostly Democrats that were hoping for the economy to tank because of covid appear to be dead wrong so far
Hi Keith,
The market has made an incredible move off the March 23 lows. Lets face it this is all about the FED’s involvement, but the question is why are they still in the mix? The markets are barely down from their all time highs. Anyway Keith can you do some analysis on the USD in relation to the CAD please.
Thanks,
Parm
will do next week
This market move was not all fed involvement. It’s a reaction to pent up demand from what appears to be a huge mistake by world government’s to shut down economies due to erroneous data regarding covid. Long term affects from this will likely be minor. The economy is merely getting back to where it was before this non event.
You are in the unpopular minority (ask any left winger if they agree with you on the shutdowns) with that opinion Dave. Which means you are likely right.
Hey Kieth, good analysis and very nice comparative charts. Though it baffles us that market is responding as if nothing happened even though most economic activities shut down, one thing has changed significantly which was not there before. That is US Fed backstop. Trillions of dollars stimulus wasn’t there before. What took months during 2008-2009 financial crisis, took days now for Fed involvement. Now if you see past 11 years from 2009 market bottom and Fed stimulus during that period, stock market performed wonderfully well. Isn’t 11 years long term enough to gauge the market? Not only that, before Covid shut down, unemployment rates were at historic lows in US. If that is how stock market performed after financial crisis, probably there are expectations from investors that this time too market performs well after Fed’s stimulus. Because economy was chugging along with lowest unemployment rates until mid of February 2020.
A question to ask, and it is only a question, not an opinion:
What happens if the effects of the Fed stimulation begin to lose steam over time? You give a kid a candy when they are good. Perhaps he/she becomes less motivated over time to be good, and demands two candies now. Eventually, perhaps the candy no longer has as much value to the child. Now what?
Just a question.
Perfectly good question. But that candy experiment was done in 2008-2009 as well. Since then we saw stock market boom. When you have a bull market for 11 years after Fed intervention, how to tell that, this time stimulus fails?