Here are the markets and sectors to focus on in trying times, writes Mike Larson....
Trade Idea: Beware of Buying the Dip in Crowded "Growthy" Sectors
10/16/2018 12:02 pm EST
“Coddiwomple” is not a word many people are familiar; it means to travel in a purposeful manner towards a vague destination. I can’t think of a single word that better describes investing in financial markets. They head toward vague destinations, writes Landon Whaley.
And we don’t know where markets are headed.
Despite this reality, if we want to be successful investors, you and I must remain purposeful in the way we approach markets as they move towards their vague destination. With that in mind, this week I’d like to coddiwomple through the Fundamental Gravity #4 environment the U.S. finds itself in here in Q4 2018.
Congratulations on successfully navigating another week of a Fundamental Gravity #4 environment! I can promise you that most investors did not fare as well as we did: we booked another week of gains in the Asset Allocation model (+0.75%) and saw a very acceptable 75 basis point loss in the G15 portfolio against a backdrop of a -5.6% weekly decline in the S&P 500 Index (SPX).
This isn’t a victory lap; I’ve been around markets too long to make the mistake of hubris. Luckily for me, I’m not in this game for ego. I’m in it because I love competing against the very best and I love the daily grind of measuring and mapping slopes and extremes in economic and financial market data across 27 economies and over 200 markets globally.
Does that make me a nerd? Probably. Do I care? Not in the least.
If you’re new to our research, I hope the last two weeks have clarified how we use our weekly reports to help you traverse financial markets as they make their way to a vague destination.
As I’ve said on many occasions, our dual mandate is to help you position yourself for opportunities most investors miss and to sidestep dangers most investors never see coming. Our objective is to help you position yourself before market moves occur, not after the fact. So far, we’ve got a solid track record of doing just that.
Entering Q4, the biggest risk (and opportunity) we saw was the U.S. Fundamental Gravity shifting from an FG2 environment to an FG4, where both growth and inflation slow together. Just two weeks into Q4, both economic and financial market data are confirming this new FG4 reality.
The media will portray last week’s rout as being about Trump, tariffs or anything else they can spin, because they don’t understand the Fundamental Gravity concept and its impact on asset classes.
However, last week’s price action was pure FG4 and nothing more. We described the FG4 in the Fundamental Gravity Summary section of Gravitational Edge as: “the worst environment for equities and risk assets. In this FG, minimize your long exposure, and hold cash levels near 100%. Short-sellers, lick your chops! It doesn’t get any better for you than a Fundamental Gravity 4 environment.”
We followed our own advice (shocking, I know) in both the Asset Allocation model and G15 portfolio, which is why we came out of last week’s destruction ahead in the former and relatively unscathed in the latter.
I still expect a bounce in the “growthy” sectors of the U.S. equity market. Remember, we are still receiving Q3 growth data for another couple weeks, which should be bullishly tilted. When those bounces occur, stay disciplined to our Playbook and our approach.
Most investors are going to make the mistake of buying the dip in crowded trades (going long tech, consumer discretionary and industrials). While this “dip buying” strategy has been hugely profitable over the last 27 months, it won’t work this time around. Buying dips in growthy sectors is all good as long as the U.S. is in either an FG1 or FG2 environment. An FG4 environment is a beast of a different kind and should be traded with the respect it deserves.
Please click here and sign up if you’d like to receive the latest edition our research reports as well as to participate in a four-week free trial of our research offering, which consists of three weekly reports: Gravitational Edge, The 358, and The Weekender.
Watch Landon Whaley discuss When Markets Cycle in a short video here.
Landon Whaley: We have a generation of investors and asset managers who know only one market. The reality is markets and economies cycle and catch people off guard.
Recorded: MoneyShow Dallas Oct. 5, 2018.
Landon Whaley interviews trader Jackie Ann Patterson: How I got started trading and how I approach it with my Truth about ETF Rotation here.
Recorded: MoneyShow Dallas Oct. 5, 2018.
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