Well, hello again, and welcome to the Smart money Dumb money show. And I’m your host, Keith Richards Portfolio Manager and President of ValueTrend Wealth Management. It’s a week before Halloween, it’s actually October 26 as I record this. And I understand it’s next Sunday, that we’ll be shelling out to the little devils and goblins. So, in the spirit of that, I have worn my orange bow tie and I will be presenting a couple of scary things on the market, but I’ll also be presenting some interesting, more optimistic views of opportunities that may be taking place in the market right now. And so, I put together a PowerPoint presentation to help you get a few ideas on opportunities that you should be aware of as well as risks that you should be aware of on the overall markets.
Interesting observations fall of 21. Now, these are random musings that I’ve just put together on research that I read and just the charts that I’ve been looking at lately, and a myriad of events that I have observed on the markets of late. So, to start with this is maybe one of the more scary Halloween-type thoughts. This is a chart going way back to 2008. And what it shows us is the blue line, which is an expectation by asset allocators, people who are money managers like myself, but who are more tactical asset allocators. They move between cash, bonds, and equities, according to where they see the best place to be. You can see the expectations of economic growth, the blue line, and the percentage of these asset allocators who are overweight versus underweight equities tend to tag along with each other.
When everybody thinks that the economy is going to do well, which is the blue line, they allocate equities accordingly. And when everybody thinks that the stronger economy is going to fade, then they allocate equities accordingly. They reduce the percentage of equities in their portfolio. It doesn’t mean they pull out entirely, but they shift asset allocation. This is a weighting of how overweight these allocators, these portfolio managers are versus their expectations of the economy. And as I noted, it’s pretty much in tandem. Now, there’s been for the first time, at least since 2008, a complete disconnect as you can see on the right-hand side of this chart. The outlook for a stronger economy by these asset allocator money managers is becoming much more bearish. They’re much more cautious as to next year’s outlook for the economy. And yet 75% of them are allocated above their normal weighting of equities.
The explanation for why they would be doing this is when they know that it’s the better thing to do as markets become riskier, which tie into how the economy is doing, they know that they should be reducing their equity and yet they are not. And the reason for that is just because of my girlfriend, Tina and Tina stands for, there is no alternative. So, stocks right now are pretty much the only game in town when you really don’t get a lot of yield from your short-term paper. And there’s a reasonable amount of risk in your longer-term bonds, because as inflation rages, that tends to be not so great for the bond investors. So, they’re staying in stocks, not because they expect a stronger economy, but because they feel there’s no alternative and that’s not necessarily a great thing.
Let’s go to the NASDAQ composite. And I did this on a blog a couple of days ago. You will notice that the NASDAQ, which has been picking up since its September pullback has actually been diverging from a momentum perspective for many months, actually since around the middle of the summer. If we look at every single momentum indicator on this chart, we can see that RSI stochastics, MacD has been diverging literally since the beginning of 2021. What does that mean? Well, what it means is that despite the rising market, the pace of that market is slowing down. You can see here; the pace was quite strong. Here, the base was quite strong, so momentum was rising. But it’s now been slowing down that tends to often to be leading into market corrections.
It doesn’t always happen, but you can see when the pace slowed down here, and the pace slowed down in 2018 and early 18 as well. We got corrections on the market when momentum began to slow down. Now, Howard Marks has a saying, he goes, you can’t predict – you can prepare. This is not an absolute rule of thumb, just because momentum is diverging is slowing down against the market. Doesn’t mean you’re guaranteed a correction, but I presented on a video last week called “Bull Bear Bottom and Bounce”. And what the video was presenting was evidence for the potential of a more volatile year in 2022. It doesn’t mean that’s what is going to happen. It does mean that if there are some signs that that’s a possibility, we should be prepared with the battle plan.
I would encourage you to watch that video. It’s called “Bull Bear Bottom and Bounce” and get some ideas on how you can prepare for a potential pullback or period of volatility next year, and the MacD and all these other indicators that are aside, whatnot, that are diverging as well as money flow, which is money. It’s all momentum at the top here. They’re all telling us the same thing that, things are slowing down. And that goes for the S&P as well. So read my blog, which was presented on the 25th of October on this subject. If you want to see the charts of the TSX and other indices versus how the momentum indicators are looking, but it’s just a bit of a heads up. There’s another maybe potentially Halloween scary fact. The next thing I want you to look at as our final potentially scary fact for Halloween is the ever-falling trend on the VIX.
Now, I also talked about this in my video of last week, “Bull Bear Bottom and Bounce”. And what I noted is that you can use the VIX in two ways. You can look at the absolute level as a signal strategy, and you can also look at the trend. But I noticed that if the VIX goes below 12 and a half, roughly it starts to get into complacency that will when it’s telling you is that options traders are not asking for a lot of premium because they don’t think there’s going to be a lot of volatility. And of course, when everybody thinks that there’s not going to be volatility, eventually there’s volatility. Same thing here, when it gets very high over the 32 markets tends to suggest that options traders think that there’s going to be volatility for the next million years. And so, they built in huge premiums.
This tends to be a pretty buy signal when premiums spike. And it tends to be a pretty good sell signal if volatility stays too low, as far as the option premiums. The thing that you can look at as well, though, is the trend like I was saying. And you can see that when the VIX trends lower from a high and end up clustering in the 12 or low area, it tends to result in market corrections. And it’s pretty consistent, this indicator. The trend here was lower than it clustered around 12 or so for a number of months in which the market fell. It happens over and over and down 2017 was unexceptional where it stayed below 12 for the better part of that year. And that was during Trump’s first election. There were a lot of business-positive policies that came out of the government that year, and that really pushed the market high. And so, the market was very, very optimistic
Now, again, all things come to an end and of course, 2018 brought with it two corrections. And so that, that, you know, the absolute level went high and, but eventually turned it down and levelled into another correction late 2018. I just want to point out that this trend on the VIX has been falling for some time. It’s literally been since March of 20. It’s been about 18 months of falling VIX premiums. And that usually ends up with a washout in VIX premiums, meaning people finally come to the opinion that there’s no volatility in sight, and that tends to end up being a signal for a washout in the market eventually happening. We’re not there yet, but it’s getting there. So just another Halloween scary fact. So enough with the market musings. We’re going to just talk about some stuff in the news.
Tesla has made a new high. Good news came out and the stock jumped out of a triangle. The triangle is setting up pretty nicely. I did make an observation back in the spring of this year. If you go back to my videos and I made a video called “Interesting Observations”, and I did say, watch Tesla, well, it certainly broke out of its triangle. So now it’s getting a little overbought when that overbought period ends. It’s hard to say, but yeah, I don’t know if I’d be a net buyer of Tesla today after this jump. Tesla’s move did indeed inspire a jump on the Dow transports, which I have talked about in previous episodes that were diverging against the S&P 500, and that’s often a bad thing, but that’s been corrected with not just Tesla, but a number of moves on some of the transport companies.
The one area in the transporting index still that was not affected positively has been the airlines. A lot of people were buying the airlines. Us included. We bought in our aggressive account, not in our conservative equity platform. We bought in our aggressive account, some American Airlines and that is this stock is right here. We were hoping for a jump, with an oversold level of the airlines and possibly a resurgence in travel and whatnot. So far that doesn’t happen, but it’s not breaking support, but it’s certainly not, you know breaking out either. It’s been a little frustrating, but there is maybe some hope for those of you who want to speculate on the airline industry. And that’s why we put it in our aggressive account. Airlines are not a sector for shy and, and weak-hearted.
They are definitely a sector for aggressive playing, not conservative playing. But equity Cox seasonal pattern does tend to show us that October, November, December can be pretty good for that sector. It pretty much makes or break it in the first quarter though, or the final quarter, because the first quarter is pretty ugly for the airline industry. So hopefully you will see some of these airlines breakout. If they don’t, I’m probably looking at selling my position. Now one sector that is breaking out is the metals.
Now I just happen to use the BMO one, but you can look at any metal ETF and you’ll see the same thing. That is, it was in a downtrend and now it’s breaking out. Copper, by the way, has been pushing new highs, at least getting back to its old highs and the metals have some catching up to do.
So that’s maybe an interesting trade. You can see the momentum indicators are starting to hook up. MacD is about to hook up, which is very good. It’s an interesting-looking trade right now. And the seasonalities in the metals are very positive. We don’t own this ETF or any metals ETF beyond a couple of metal stocks directly. But we expect to be averaging in and buying more of the metals very shortly. So that’s about it. I just want to thank you once again for watching the show. And if anything comes up in your mind, if you have any questions, or if, as I mentioned at the beginning of the show, you have a need for an active portfolio manager to take over your portfolio. Then we’re more than happy to talk to you about that.