Trading volume has been stronger on the sell side, which should tell you something about the current market and how close we are to a low, writes Landon Whaley.
After markets got treated like Marvis Frazier last week and Monday, investors have just one question: is the bottom in for financial markets?
I could completely geek out on you with a New York Public Library worth of data to support my belief this is only the beginning and that things are only going to get worse. But I won’t do that today; instead, I’m only going to share one data set. What’s this most critical data set that will tell us if the bottom is in or not? Conviction.
Conviction isn’t just crucial for those brave souls fire walking at a Tony Robbins seminar or folks considering marriage, it’s also a tell-tale sign in equity markets.
There have been 16 trading days since the market first got wobbly with a -1.0% decline on Friday, Feb. 21. Over those 16 trading sessions, 12 have been losers, while four have seen the S&P 500 claw back some losses.
As for conviction, the total U.S. stock market volume (all exchanges) during those 12 daily declines was 50% higher than its one-month average, 78% higher than its three-month average, and 98% higher than the trailing 12-month average.
How about the days when the S&P finished in the green?
During the four trading sessions with gains, the total U.S. stock market volume was just 19% higher than its one-month average and 34% higher than both its three- and 12-month average. Not only that, but all four days with gains saw an average of 25% less volume than the previous day when the markets sustained massive losses.
This conviction data tells us in no uncertain terms that we only see marriage proposal and fire walking-level conviction when the stock market is getting pummeled.
However, despite the rising bear market conviction, there is a slew of advisors — not to mention TV talking heads and Larry Kudlow — out there telling clients, who just watched their portfolio get body-bagged, that they should sit tight with their U.S. equity exposure because “it always comes back.”
To those charlatans, I see your “it always comes back” guidance and raise you a data-dependent case study.
Let’s assume that you and a friend each had a $1,000,000 at the S&P 500’s new all-time high on September 21, 2018, and that you both rode the market for the full 19.3% drawdown to its intraday low on Dec. 26, 2018.
Now let’s assume that your friend takes her advisor’s advice to stay put, and she leaves her now $807,000 account in equities. However, you’ve just recently started reading Gravitational Edge every Monday and smartly decide to position yourself for the future, rather than driving decisions based on what happened in the past. You sell all of your S&P 500 exposure at the Dec. 26 low and put the resulting $807,000 in long-dated Treasuries. That’s right, instead of selling high, you’ve sold the absolute low. Yikes!
Fast forward 14 months, and as of Friday’s close, your friend has $844,929 in her account thanks to the S&P 500’s 4.7% cumulative return since that Dec. 26, 2018 low. On the other hand, your account is worth $1,087,836, driven by the +34.8% return in Treasuries.
Not only is your friend still -15.5% away from her September 2018 peak account value (while you’ve gained everything you lost in Q4 2018 back plus an additional 8.8%), but she stomached a 17.5% drawdown compared to the 8.2% drawdown in your account. In short, you’ve enjoyed seven times the return with half as much drawdown risk!
As Marcus Aurelius once said, “Think of the life you have lived until now as over and, as a dead man, see what’s left as a bonus and live it according to Nature.”
Folks, it doesn’t matter what’s happened in your portfolio before today. The only question you need to ask every day is: Am I currently positioned for the most likely economic and financial market outcome(s) over the next one-to-three months? If the answer is “yes,” then sit on your hands. If the answer is “no,” then take action necessary to turn it into a “yes.”
For those of you still positioned heavily in U.S. equities or who have compounded that mistake by listening to “experts” who told you to buy every dip, the answer to the above question is “no,” and you need to take action.
The combo platter of the bear market conviction in equities with the plethora of U.S. and global economic data sets that are about to catch a case of the Coronavirus, means there is a high probability of a U.S. recession and another 20% (at a minimum) leg lower in U.S. equities. Trade accordingly.
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