Opinions
Brian Kelly A Comment -- General Comments From an Expert A Commentary COMMENT Oct 25, 2021
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Premium contentHis team has been highlighting 4 developing technical negatives that suggest equity markets are a bit stretched.
At the start of the year they were very cautious, looking for the bigger correction that happens every 3-5 years. Thinks we got that from Feb-April. They recognized that it was a tradeable low, but didn't realize it was going to be "the" low. The recovery was really quick. At the end of May/early June, they were telling clients there was a medium-term rally with upside into August and also that a new 3-5 year cyclical bull market was underway.
What they've been noticing over the last couple of weeks is that investor sentiment is starting to get a bit too bullish. We've had a 35% move off the lows. The other thing is that seasonality is telling them that August and September are typically the weakest months of the year. So that's looming.
Short-term price momentum has been stalling on a variety of indices. Underneath the surface, a lot of the leadership names that were leading this rally are showing signs of giving up the ghost.
All these things together tell him there's going to be an air pocket of 5-8%. But he'd be using that air pocket to add exposure, because his team thinks we're in a new bull cycle that has upside into the second half of 2027 and first half of 2028. This will be a common theme of today's show -- most names mentioned could benefit from investors waiting to add exposure during the potential upcoming correction.
Because the tech sector has been so bloated, that space could see a correction beyond the typical 5-8% that you'd see in other sectors. Based on the beta of a stock.
There have been a variety of names in the US specifically. Names like AAXN, HWM, and RCL. They'd broken out to new highs, which is very bullish. That was telling him they were the leaders of this new bull cycle. However, over the last couple of weeks they've started to break down. Not just in relative terms, but also in absolute breakdowns.
The leaders breaking down typically suggests that a bigger correction is likely to follow soon.
His team looks globally. They do look at a variety of stocks in Europe and Asia, but their focus is NA and where 90% of their research is targeted. So it's in the NA market where they're seeing a lot of the early signs of market breakdown.
There are stocks that continue to power higher, and the market's very attractive at the start of a new bull trend. But in the intermediate term, things are priced to perfection. Expects some kind of weakness, and he'd be looking to add exposure then.
A short-term pullback typically lasts 1-3 weeks. That's what we've seen over the last couple of weeks. Looks as though markets are starting to grind higher, and that advance phase is typically 2-4 weeks. If he's correct on the bigger call of an intermediate-term correction, it will usually last 1-3 months.
There are 2 ways you can correct. One way is in price, which is how most people think of it. The other way is in time, and a glance at the chart for gold demonstrates this. After gold moved up, it's been consolidating in a sideways trend for the last couple of months.
Could be legislation, tariff-related, geopolitical crisis that affects prices of commodities, or a financially related event. Any of those could shock markets and see them come under pressure. August tends to be high volatility, but with low trading volumes, so there's low liquidity. If there's low liquidity, then moves can get exaggerated.
He likes to be the one making the decision, rather than being forced to make a decision. So he's more proactive with his portfolio.
In all his conversations with professionals and savvy people, not a single person says "Yup, this is how it should be." Most people think there's a disconnect.
Longer term, if you look at the interest rate policy we've pursued since the financial crisis of 2008, it has destabilized the bond market to the benefit of the equity markets. So equities and valuations have benefited. At the same time, we have an ongoing new paradigm as it relates to AI. And that's feeding off of itself too.
So it's a number of things happening all at once. At his firm, they just look through all of that and assess where we are today in relation to a long period of history, and where are we going in the future? They still like the stable fundamentals of the companies they own.
The theme that will most likely come through in today's show is "For new money, wait for a better entry point."
What's interesting about the negative reactions in April, and earlier this year when the tariff news first hit, is that it wasn't the general economy stocks that were impacted. It was the tech stocks. So he hesitates to say where the market's going to go based on the general economy.
He's not too concerned with trying to figure out where we are in the cycle. It's really driven by policy. Right now, policy is saying we're going to cut rates. The US President is saying we're going to cut rates. So the market has given an almost-Pavlovian response by pushing up valuations.
On the overall economy, real-time data doesn't look very good. Port landings, freight traffic, trucking company and courier results all show problems. Consumers aren't necessarily getting stuck with tariffs. It's the retailers, importers, and manufacturers that are swallowing the extra costs for now. Once those start to get passed through, it will start to hurt the consumer.
Consumer discretionary is the worst-performing sector in the S&P this year, and that shows you where the limited impact is. But the market as a whole has been able to power through that.
Fall is the weaker period for equities, so he's hoping to see some opportunities. But he's not super-optimistic.
Good place to get some income. Nice spectrum of companies with higher yields, lower yields, higher growth, and less growth. He wants to have a mixture, but also a core position. He's tilted more towards natural gas than oil, because fundamentals for nat gas in Canada look pretty good relative to the oil fundamentals (sideways market barring some sort of crisis).
Still thinks both the Canadian natural gas and oil stories are positive. CAD below 70 cents makes us more competitive as well. US shale production may or may not last at current levels -- both in terms of capital required and lifespan of reservoirs.
Don't divest. Instead, hunker down in a few core names. See his Top Picks.