A New Pricing Regime
Just a quick note today to update you on my current thinking.
Last Friday I described the equity market’s extreme ambivalence. And I, like the market, was equally torn between a bull and bear case.
My bull case:
1) Clear 1-year range in volume distribution points at a rangebound S&P.
2) Stock valuations are not expensive based on previous revenue growth rates.
My bear case:
1) Massive gap in distribution that price could cross.
2) And…uh…stuff.
Stuff includes:
- Recession
- Deleveraging
- Geopolitical kerfuffles
- And collapsing productivity
At the time — 4 trading days ago — I was 50/50. The only reasonable bet was to position for extreme moves in either direction. Not to swing for the fences with all your trading capital but buy insurance either way. That way should the market muddle on, I knew exactly how much I would lose (buying puts and calls keeps it simple like that). But any big move would give me a gain on one leg of the trade to more than compensate for the loss on the other.
And with the market we’re in, betting on big moves is a safe bet.
Since then, the S&P 500 has hovered right around 4,000 — a pivotal point as it lies right between the indexes range over the last year (from 4,000 to 4,800) and below (4,000 to 2,800).
2-year chart of S&P 500 including volume profile at right (how trading volume was distributed across the trading range). The green arrow points to April 1, the day we crossed 4,000. The red arrow below points to the volume from that trading day.
This was the point between currents that I pointed out last week. One year ago, the market quickly stepped into new territory. It crossed 4,000 in a day and didn’t look back. The low volume leap through that level put the S&P into a new regime.
Since last Friday, the market has been caught between the pull of a higher stock prices based on justifiable expectations of continued revenue growth and the specter of recession (plus everything else).
But as conditions changed, I changed my mind.
Throughout this week I’ve gone increasingly short. Not so much because I was looking for ways to go short the market but because the best trades I’ve found this week have all been to short individual stocks.
In a way, I’m not betting on the markets falling, I’m listening to them tell me they want to fall.
And over the next few weeks, we’ll get a chance to see how good my hearing is.
Look, a lot of people got very long in 2021 following the Covid stock market route. A lot of people got even more long during the stimulus fueled rally of the last year.
And the risk appetites of all those buyers is about to be tested.
Because with the kick lower from a higher-than-expected inflation print today, I believe stocks have moved from being stuck in the doldrums between strong higher and lower currents to caught in a vortex of panic selling below.
And as I’ve gotten increasingly short the market this week, so too have the members of my new service — the 21st Century Wealth Society.
Since last Friday’s ambivalent bet, we’ve put on 7 trades, all positioned to benefit from collapsing risk appetites.
You are free to check us out at any time. Because as conditions change, it’s good to work with someone who listens and can change his mind.
Take what the markets give you.
