Ray Dalio is considered by many investment professionals to be a market maven. While he paints a disturbingly bearish picture, he also warns that markets may have more room to the upside. Indeed, there is a decent setup for a short-term, tradeable bounce, advises Lance Roberts, editor of the Bull Bear Report.
In recent times, Dalio has repeatedly emphasized that markets are in a bubble characterized by unsustainable valuations, excessive leverage, wealth concentration in a few assets (e.g., “the AI beta chase”), and euphoric sentiment.
But the conditions are not ripe for the “pricking” of the bubble that would generate widespread selling. He cites three conditions or triggers to watch for to gauge when the bubble may pop: tightening monetary policy, negative fiscal policy shifts, and liquidity crises or debt coverage needs.
Meanwhile, given that this is a light trading week due to the Thanksgiving holiday, the deluge of data will likely add to recent market volatility. But we remain focused on the seasonally strong period from today into year-end. With corporate buybacks in full swing and bullish sentiment remaining stable, the recent correction has alleviated much of the previous overbought condition.
That leaves investment managers who are underweight in equities in a better position to increase their equity allocations and improve performance heading into the year-end reporting period. Both consolidating equity positioning and equity sentiment have moved into negative territory. That negative positioning is a decent setup for a bounce. Trade accordingly.
