11/20/2020 9:00am EST - Trading Lab Morning Email

In "Mastering The Market Cycle", legendary investor Howard Marks says that in order to figure out where we are in the market cycle we need to ask ourselves two key questions:

"How are things priced? And how are investors around us behaving?"

The answers to these questions will give us a sense for where we stand in the cycle.

Let's ask ourselves these questions today with regard to QQQ and SPY. Let's begin with the second question, how are investors around us behaving?

We have just experienced the largest two-week inflow to global stocks ever on the back of the Pfizer vaccine news.

Naturally, investors are also extremely optimistic on growth expectations for 2021:

And we already know that there has been a massive number of newly minted day traders in 2020 due to Robinhood and all of the "trading education" programs utilizing YouTube/Instagram marketing strategies to sign up new suckers....I mean traders.

These day traders are currently aggressively long leveraged ETFs betting on a further stock market rise:

So, I think we can answer how investors around us are behaving. They are incredibly bullish and optimistic.

Now, how are things priced?

Hedge funds are basically all-in long equities right now, with gross exposure of ~250% and net exposure of ~90%. They are also preferring growth stocks with very high forward multiples - the Hedge Fund VIP Basket currently trades with a two-year forward P/E multiple of 25.

We also know that the Shiller P/E for the S&P 500 is nearly double its average of roughly 17x, and has only been higher than it is today one time before.....at the peak of the dot com bubble in 1999/2000:

Investors/traders are throwing caution to the wind and exhibiting a voracious appetite for risk. The belief that vaccines are a panacea, and that the Fed will continue to pump liquidity into the market ad infinitum have galvanized an unusual appetite for equity market risk taking against a macro backdrop that is anything but healthy. 

While investors have piled into stocks in the last two weeks, they have hit the exits in gold in unison:

My contrarian instincts are tingling this morning. 


DISCLAIMER: The work included in this article is based on current events, technical charts, company news releases, and the author’s opinions. It may contain errors, and you shouldn’t make any investment decision based solely on what you read here. This publication contains forward-looking statements, including but not limited to comments regarding predictions and projections. Forward-looking statements address future events and conditions and therefore involve inherent risks and uncertainties. Actual results may differ materially from those currently anticipated in such statements. This publication is provided for informational and entertainment purposes only and is not a recommendation to buy or sell any security. Always thoroughly do your own due diligence and talk to a licensed investment adviser prior to making any investment decisions. Junior resource companies can easily lose 100% of their value so read company profiles on www.SEDAR.com for important risk disclosures. It’s your money and your responsibility.