This week’s “Headline Risk” focuses on the motivation risks embedded in Wall Street, writes Landon Whaley Wednesday.
Headline risks are everywhere, much like year-ahead Wall Street forecasts during December. As an investor or trader you must keep your head on a swivel and human reactions in check so that you’re not drawn into well-written narratives that promise to unveil the mystery of financial markets.
CNBC’s “Trading Nation” segment carries the slogan “Where Headlines Become Opportunities.” I think it should read “Where Headlines Become Losses.”
Last week, the network trotted out Raymond James’ Chief Investment Strategist Jeff Saut, who said, “You can carry this market up over 3,000 by the end of the year. That's how bullish I am.”
This forecast would mean a +12.2% gain between the close on the day Jeff made the proclamation until the end of the year. This gain would represent an approximate quadrupling of the S&P +3.3% year-to-date gain and mean that the S&P 500 (SPX) would make a brand new all-time high. And all of this is supposed to occur before the ball drops in New York City!
With a monster call like this, Saut must have a compelling upside catalyst, right? Drum roll please … and the catalyst is …
“If this thing starts up, I think the pros are going to have to chase it because their performance has been abysmal this year.” That’s it.
Long-time clients know that we always remain data dependent, process driven and risk conscious. This mantra anchors our decision-making, and it allows us to keep our heads while those around us are losing theirs, and Jeff has certainly lost his.
The data says that in the 1090 months since February 1929, the S&P 500 has gained double digits in a single month on only three occasions, and all three occurred in the 1930s. Forget double digits; the S&P 500 has only managed to gain more than 5% in a single month on 13 occasions, the last time being January 1987, a solid 32 years ago!
Folks, I’ve been professionally trading markets for almost 20 years. While a good deal of the trading edge our process generates comes from understanding and exploiting the “humanness” of professional asset managers and Wall Street-types, I know for sure that it’s not “the pros” who drive markets. What drives markets is Fundamental Gravity.
Would you like to know how many of those +5% rallies occurred against a Fundamental Gravity #4 backdrop? Zero. Donut hole. Bagel. Not a one.
Not only is the current Fundamental Gravity a bearish headwind, quantitatively, but for Saut’s call to ring true the S&P would have to break through not one but three critical Alpine lines: 2772.28, 2812.08 and 2931.15.
Is an epic 1930s-style rally possible? Of course, it is; anything is possible. But we aren’t in the business of telling you what’s possible, we are in the business of telling you what’s probable.
Simply put, a one-month, 12% rally ain’t probable.
The Headline Risk bottom line is that you must always be aware of the motivation behind your sources of information. Wall Street’s (and Saut’s) compensation correlates directly with the direction of equity markets. It’s in their best interest for markets to be bullish and for you to be bullishly inclined. These guys don’t make nearly as much money if you choose to sit in cash, which is why Saut’s motivation is to keep Raymond James’ clients invested despite the Fundamental Gravity #4 reality.
If you’ve been with us for any period of time, you know that our only motivation here at Whaley Global Research is to help you sidestep dangers most investors don’t see coming and to position you for opportunities most investors miss. We don’t limit what we have to do to achieve that objective, which is why we go long and short, and why we trade all four major asset classes: stocks, bonds, currencies and commodities. And we certainly aren’t scared to hold cash, which is a four-letter word on the Old Wall.
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Watch Landon Whaley’s 3 Ideas for Investing and the meaning of coddiwomple in a short video here.
Recorded: MoneyShow Dallas Oct. 5, 2018.
Duration: 6:42.
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.
Duration: 5:51.
Landon Whaley interviews Adrian Manz: How I approach stocks here.
Recorded: MoneyShow Dallas Oct. 5, 2018.
Duration: 7:48.
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.
Duration: 6:14.
Landon Whaley interviews John Carter: How I started trading here.
Recorded: MoneyShow Dallas Oct. 5, 2018.
Duration: 5:37.
