MarketCycle Wealth Management

 

Up, Up, and Away!

 

There are seven things that always happen at major stock market bottoms going back as far as 72 years (some of these can only be tested back to 1950).  All seven triggered in mid-June.

MarketCycle’s proprietary indicators are shouting in unison:  “Up, up, and away!”  It is not logical to remain bearish upon seeing obvious bullishness.  If these signals flip back to bearish, which would be highly unusual at this point, then we will simply change our position (which is also logical).  But right now MarketCycle is fully bullish, although we’re using a barbell approach of defensive stock sectors & factors that are balanced out with early-cycle aggressive assets.

It is quite possible that a recession will still be called, although it would likely be a fairly insignificant recession, one in name only, a “technical” recession, a “profits” recession, a “growth” recession.  But not a “real” recession.  Maybe the powers that be will state that we have already been in a recession and then everyone will say in unison:  “Oh yes, I knew that.”   When the Federal Reserve raised interest rates on Wednesday (July 27th) by a whopping 0.75%, the only part of the yield curve that counts (the 3-month-yield to the 10-year-yield) not only did NOT finally invert, but it actually got steeper.  The most important signal of a coming recession got more bullish, contrary to what should have happened.  And two back to back quarters of negative Gross Domestic Product (GDP) do not a recession make.  Meanwhile, so far 70% of corporations have beaten their quarterly earnings estimates, employment is still super-strong, the consumer is still steadily spending and insiders are still buying shares of their own corporations… at a record pace.

Since stocks move about 6-12 months ahead of a recession, if a recession does eventually occur, it may not be noticed at all by the stock market when/if it arrives.  Right now the stock market is focusing on 2023 and it has already priced in most of the events that could or will occur during the second half of 2022, including rate increases, recession, war, Covid, Monkey Pox, Cooties and the fact that a large swath of the globe is literally on fire right now.  The economy moves in real time but stocks move way ahead of the economy; this is why stocks dropped six months before anyone even considered that a recession was a possibility.

And we have to remember that stock prices actually reflect the strength of the underlying corporations, so stocks, over longer expanses of time, are distinct and separate from the economy.  “News” only affects stocks for short periods of days to weeks.  So, by December of 2021, stock prices had gotten ahead of the actual strength of the corporations and they had to come back down to earth… thus, the recent bear market.  Stocks are now fairly priced and we even experienced a capitulation bottom in mid-June… thus, the next bull market.

In mid-June we had an actual capitulation that went totally unnoticed; everyone threw in the towel and gave up hope.  Most traders deny that we had a capitulation… almost all traders are still waiting for the VIX (volatility index) to move above 40, but if one were to look at a long term chart of the VIX, it is quite clear that “40” is a totally meaningless and random number.  Bull markets, like the Phoenix, rise out of the ashes of a burned down stock market and the market has already burned down.  A number of things give evidence to this and a few are shown below.

 

The record move from stocks to cash is (contrarian) bullish. (Chart courtesy of Bloomberg)

 

Massive wealth destruction (because both stocks and bonds sold off at the same time, which is exceedingly rare) is actually bullish because valuations have been completely reset.  Stocks are now worth more than their current asking price. (Chart courtesy of Bespoke Research)

 

Margin debt, money borrowed for investment purposes, has been voluntarily surrendered… it is usually via a forced liquidation but this time it was (smartly) purely voluntary on the part of hedge funds and big institutions like Goldman Sachs. This eliminates the need for the usual and falsely expected final leg down for the stock market.  (Chart courtesy of WolfStreet)

 

Corporate earnings have likely bottomed or are very close to bottoming.  Stocks are now cheap.  (Chart courtesy of Haver Analytics)

 

Inflation has likely peaked, as MarketCycle first stated several months ago.  We were one of the first to see inflation rising (back in early April of 2020) and one of the first to see it peaking and heading lower.  In the bold red circle below, the purple line is accelerated inflation data, now moving down, and the higher grey line is an accelerated rate-of-change of the purple line, which gives an even earlier signal. (MarketCycle chart)

 

This next chart does not show inflation peaking, yet, but it does show expections for inflation to soon settle at 3-4%, exactly as MarketCycle stated some months back. (Chart courtesy of ING)

 

Inflation levels follow Fed ‘money creation or removal.’  This chart from the Federal Reserve (and their massive research department) suggests that inflation will be at 2.3% by this time next year (my estimate is 3.3%).  Why do I seem to concentrate on U.S. data?  Because the United States has lead in relative strength since October of 2011.  This will all change in the 2030’s, but right now, as goes the United States economy, so goes the rest of the world.  But the inverse does not hold; when the globe is economically weak, it has little affect on the economy of the United States.

 

This chart from the Federal Reserve shows that “prices paid” by manufacturers is dropping fast (far right on the chart)… this means that inflation is dropping fast even though most economic data does not yet show it.  Inflation is the thing that hurt the stock market for the first 6 months of 2022.  No or low inflation = good for stocks.

 

Inflation is when the things that you buy cost you more.  Items cost more because the price of the commodities out of which they are made has gone up.  The commodity that gives the clearest image of what is happening with all commodities is copper, also known as “Dr. Copper” because of its ability to diagnose.  This next chart shows the price of copper and it also shows the two times that we gave predictions (in this blog) on the future prices of commodities and inflation.  There couldn’t be a clearer image of the fact that commodities (and house prices) are falling (right side black line, straight down like a knife cut), copper having fallen from 5.15 to 3.38… a 40% price drop in just 4 months.  (MarketCycle chart)

 

This next chart shows bear markets that did not lead to a real economic recession.  Some recessions are in name only… so called “growth recessions” which are actually slow growth periods rather than deflationary & recessionary periods.  If an official recession is called, it may not mean that much this time around. (Chart courtesy of LPL Research)

 

Smart money… the red line below is the S&P-500 and it always eventually follows the (blue line) smart money, which is now very bullish even as the retail investor is still cowering.  People have a mental tendency to project what is happening today into the future, falsely believing that what is happening today (bear market) will continue indefinitely.  But real experience teaches us that stocks are going to go back up and then on to new record highs.  (Chart courtesy of Bloomberg and Knowledge Leaders Research)

 

Note on the chart below how the stock market always zig-zags on its way both up and down, even though, over time, it moves in a general trend direction for extended periods that can last for as much as two decades.  I don’t expect the trend channel (formed by the two blue lines) to end until sometime around 2029.  (MarketCycle chart)

 

Ed Yardeni, just another in a number of well known (for a reason) high cost analysts suggesting that the bottom is already in and that a new cyclical stock bull market has started. (Bloomberg headline)

 

MarketCycle has already seen our 7 bottoming indicators all trigger and our many bull market indicators move to bullish.  If we are wrong, and I don’t currently believe that we are, then we will be willing to switch our positioning to reflect the change.   We have to remember that the stock market moves 6-12 months ahead of what you are currently seeing in the news.  When you start to believe that a recession is coming, the stock market has already priced that into the market many months prior.  When you are at your worst emotional point, the market is already looking ahead by 6-12 months and it doesn’t care about your opinion.

For the record, most of Wall Street disagrees with my current assessment, but I generally find this to be a normal occurrence when the market is at an extreme.  Right now, all of those assets and sectors that would normally lead at the beginning of a new cyclical bull market are now fully leading the way up even on “bad news days.”  Assets and sectors that always lead at the end of a bull market are falling fast.  And assets that perform well during recessions are also now rapidly weakening.  Everything is lining up and rotating the way that it should be if we were moving into a brand new CYCLICAL stock bull market even while the overlapping and super-strong SECULAR stock bull market remains fully intact.  You will eventually see the S&P-500 @ 10,000.  So, perhaps it really is “up, up, and away!”

 

 

Thanks for reading!

MarketCycle Wealth Management is in the business of navigating YOUR investment account through rough waters.  Professional management can pay for itself.  It is simple and easy and affordable.  And our personal investment accounts are positioned exactly like our clients, so you better know that we’re constantly & continually on top of things.

REPORT website… there is a link to our second website via this website.

 

 

MARKET CYCLE  —  DUAL MOMENTUM  —  TREND FOLLOWING  —  LOW VOLATILITY  —  HEDGE FUND

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Finding a Bottom

It is my responsibility to identify high risk periods that may signal a market top and to also identify then reduced risk periods that may signal a good bargain-buying opportunity.  You cannot time the market tops and bottoms, but you can quantify risk levels and decide if it is time to wait things out until perceived risk levels once again abate.  They are almost the same things.  Most times this process is fairly clean as in 2000 and 2008 and 2015 and 2018 and even 2020.  Sometimes it is all a bit jumbled & confused as in 2022.  At least I was a bit confused.

MarketCycle identified higher than normal risk levels in very late 2021.  We eventually felt that a bottom would be made at around 3815-3800.  This support area tried desperately to hold, but ultimately failed to offer strong enough support because of renewed rising inflation data that was being caused by sanctions around the Ukraine War.  We now feel that the market will likely bottom with the S&P-500 @ 3500-3400.  At 3500, the market will have pre-priced in just about anything bad that could possibly happen, including a recession; the market always prices in events before they happen because it is forward looking by many months.  Right now it is pre-pricing in what it expects to be happening to the economy in late 2022 or even very early 2023; it will soon be pricing in what it expects to occur after that time period.  Stocks and the economy definitely do not move in unison, as many people mistakenly believe.  Stocks move many months before the economy, in both directions.

So, we have had a fairly troubling but temporary downturn; the prolonged duration of the event makes it seem worse than it actually is.  Right now it is just a typical downturn in percentage losses.  It is definitely less than what temporarily happened in 2020 with the covid shutdown.

Even though I now expect the stock market to eventually head down to the S&P-500 @ 3500-3400 area, the stock market is currently oversold and it is due a bounce.  This bounce, if it manifests here and now, may last for one week or multiple weeks.  Counter-trend rallies always happen in bear markets (usually 3 times), but then the market heads lower again (until it finds its bottom).

In the unlikely and unexpected event that S&P-500 @ 3500-3400 does not hold, in a “worst case & world ending scenario,” where might the final bottom area be found?  S&P-500 @ 3200… not too far below the above suggested bottoming area.  But if it were to hit here, the market might move higher again at such a rapid speed that it would almost be remembered as some sort of dream-like non-event.

When looking over MarketCycle’s array of indicators this weekend, I could see that we might get & need a bounce, here or soon, in order to somewhat later bottom officially and correctly.  There are two price gaps on the price chart of the S&P-500 and these have to be back-filled.  I would be a bit surprised to see both gaps back-filled during a market bounce.

This bear market has been caused because of rising inflation levels.  What would cause the 18 year Secular stock bull market to continue higher?  The elimination of too high inflation.  MarketCycle’s indicators are now saying that inflation has recently peaked and that if it stabilizes here, then it will fall, and if it falls, then the stock market will love it.  And when China reopens its economy, which can’t be too far away (their next planned national meeting is in October), then this would also give a big bullish infusion to the markets.

Both of the price gaps (purple arrows) and both of the strong bottom support areas (purple dashed lines that represent strong potential bottoming areas) are shown on this chart:

 

Ultimately and in the hindsight of looking in the rear-view mirror, the large rounded area on the chart above may look a bit like a big speed bump in the pathway of the continuing and profitable Secular stock bull market.

 

Thanks for reading!

MarketCycle Wealth Management is in the business of navigating your investment account through rough waters.  It is simple, easy and affordable.

 

 

MARKET CYCLE  —  TREND FOLLOWING  —  LOW VOLATILITY  —  DUAL MOMENTUM  —  HEDGE FUND

MARKETCYCLE WEALTH MANAGEMENT

No, the yield curve has NOT inverted.

 

Every two seconds in the financial press:  “The yield curve has inverted and we’re heading into recession!  The yield curve has inverted and we’re heading into recession!”  But, no it has NOT inverted and the U.S. is NOT heading into a recession.

The normal yield curve, in a healthy bull market, looks like the panel on the (above) left; short-term interest rates are at a lower yield-percentage than are long-term interest rates. To borrow money, one would have recently paid 2% for a less risky short-term loan (that might be paid back within a few years) and perhaps 5% for a long-term 30 year loan (because loaning money out for a full 30 years is more risky).  The Federal Reserve directly controls short-term interest rates and traders/investors mostly control long-term rates.

When the economy becomes overheated and/or if inflation rises too high, then the Federal Reserve must raise short-term interest rate levels in an attempt to weaken the economy enough to allow for the release of excess built-up economic heat (before everything literally blows up).  It is better to release a controlled amount of steam than it is to allow for the explosion of the entire economy.  If the Fed raises short-term rates, then it costs corporations more money to borrow for their short-term needs; if corporations weaken, then stocks weaken since stock ownership represents partial ownership in a corporation.

The right side of the above image shows an inverted yield curve where the Fed has had to purposefully weaken an overheating economy.  They raise the part of the yield curve that they control, the short-term rates, to an extremely high level even while the long-term rate level falls as investors buy long-dated Treasury-bonds as investment account protection.

The economy works sort of like a pair of lungs; it expands and then it contracts.  It is better to be able to offer some controls, via interest rates, than it is to allow economic growth to go too far in either direction.

With interest rates having fallen for the past 40 years and with the short-term rates recently near 0%, the Federal Reserve will generally, over the next 15 years, be gradually raising interest rates in a zig-zag manner based on where the economy is at any given time. They will still lower rates during recessions and raise rates during any over-heating, with a general and gradual upward bias over time.

In my opinion, we may eventually see the short-term interest rates near 25% in the late 2030s, but we’ll reserve this economy-crippling story for another time.

The financial press is all about how the YIELD CURVE has now inverted.  It has not.  Again, it has not inverted.  The only part of the yield curve that is important (and always accurate) is the 3-month as compared to the 10-year.  This next chart, which offers a unique view of the yield curve, shows that the yield curve is not only NOT in inversion territory, but it is getting even stronger and more bullish. (Note: the blue arrow on the right side of this chart shows where we are today, the S&P-500 is shown as a black line, the red boxes show recessions that correspond to the red “WARNING” dips below the green line.)  Simply put, on this chart below, red = WARNING… but right now, as of today, the green area is going higher, not lower.  It would take a minimum of a full year to reach the red “RECESSION-WARNING” zone and likely even longer.

 

 

So, even though MarketCycle expects some increasing volatility in the near-term, the U.S. economy itself is, once again, getting even more bullish.  The United States economy is currently (still) leading in strength relative to all other countries.  Where our economy goes, so goes the economies of everyone else.  So, the U.S. avoiding an economic recession in the near-term is vitally important on a global scale.

 

Thanks for reading!

MarketCycle Wealth Management is in the business of navigating client investment accounts through rough waters.  We have worked hard to be able to identify high risk periods and to protect client accounts when we foresee this happening.  The process is simple and easy and affordable.  There is a CONTACT tab at the top on the website.

Our second (paid member) website (REPORT) can be accessed via the link on this website.

 

 

MARKET CYCLE  —  DUAL MOMENTUM  —  TREND FOLLOWING  —  LOW VOLATILITY  —  HEDGE FUNDS 

MarketCycle Wealth Management

The following is a synopsis of what the larger professional institutions and their research departments are expecting for 2022.  Their opinions do not necessarily coincide with MarketCycle’s current stance or predictions.

This is our highly condensed version extracted from literally hundreds of pages and dozens of videos and podcasts.  [Note: PDF & print function can be found in the bottom blue footer area of our website.]  Some of the newsletters from which this information is extracted are quite expensive and often unavailable to the retail investor.

Many of the predictions below offer end-of-year targets.  I can vouch for the fact that nobody actually knows where the stock market will end the year 2022, but in December of 2020 MarketCycle did correctly state that the highest that the S&P-500 could go in 2021 while still remaining in its current trend channel was 4800 (which it hit on December 30, 2021).

 

 

So, drumroll please…  here are the institutional predictions for 2022:

 

GOLDMAN SACHS:

1. End-of-year S&P target = 5100
2. “Decelerating economic growth, a tightening Fed and rising real yields suggest that investors should expect modest returns next year.  The S&P-500 has historically generated an average 12-month return of 8% in environments of positive but slowing economic activity and rising real interest rates.”
3. “Corporate profits are set to be the driving force for a further rise in the stock market next year.”
4. “The Fed will begin to hike rates in July; real interest rates will rise, solidifying the ceiling on valuation multiples and driving rotations within the market.”

 

CHARLES SCHWAB:

1. “The U.S. stock market will probably deliver more modest gains in 2022, accompanied by higher volatility.”
2. “We will likely be dealing with gluts next year rather than shortages of consumer goods.”
3. “Inflation pressures are likely to ease by mid-year.”
4. “There is a risk that the major stock indices, at some point in early 2022, will reflect the same weakness that has persisted under the surface.”
5. “Because of inexperienced younger retail investors, there is a ‘surrender to the narrative or else’ attitude online and it is really frightening, because if you say that Bitcoin is overvalued, or Tesla is overvalued, or whatever SPAC is overvalued, these trolls in anonymous accounts come out of the woodwork and start attacking you.”
6. “Buying on speculation has increasingly been leveraged by ever-higher levels of margin debt (borrowing money from a brokerage in order to invest).  Given that margin borrowing is now being used by a broader cohort of young investors, it means that margin calls (the brokerage taking back the loaned money) may come more frequently and after smaller downside moves in stocks, a risk to consider as we head into 2022.”
7. “The recent weaker breadth trends bear close watching in 2022.”
8. “Macro backdrops that include slower growth and a move from a loose to a tighter monetary policy tend to usher in higher intra-market correlations and greater tail risks.  We continue to recommend a bias toward Quality stocks and not trying to utilize sector rotations.  For stock pickers, we believe that factor-based investing makes more sense than simple sector-based (or traditional growth/value index-based) investing.”

 

EVERCORE (Ed Hyman, voted #1 Economist for the past 41 straight years via Institutional Investor’s Annual Survey):

1. Ed predicted a profitable “blow-out” year in 2021.
2. “2022 will be a very great year too.”
3. “The extreme growth of 2021 will continue in 2022 because monetary stimulation acts with as much as a 5 year lag and $4-trillion was added in 2021 alone, and additional stimultion continues even today.  There is still a huge wealth effect comng from the Fed and various governments.”
4. “I expect 7% GDP in 2022 and this is big.”
5. “Inflation has already peaked and supply chain problems have already gotten better.”
6. “Wage inflation and also our attempt to fight the changes coming from climate change will slow the drop in inflation levels.”
7. “This inflation spike may eventualy bottom at 3%-3.5% rather than at the prior 2% level.”
8. “It feels like we are eventually heading towards a future 70’s type inflation situation.”
9. “Watching the Federal Reserve is even more important than usual.  The Fed will raise rates to 3-4% over the next couple of years with a negative impact coming two years later.”
10. “Corporate earnings will be well above average in 2022.”
11. “For 2022, move back into technology stocks and add healthcare stocks.”
12. He feels that the Fed won’t be restrictive until they exceed 4% interest rates, perhaps in late 2023, and the market will not react until 1-2 years after that threshold is hit.

 

BRIEFING INVESTOR:

1. “2022 stock market return expectations should get dialed down.”
2. “There is a burgeoning understanding that earnings growth will be slowing in coming quarters.  According to FactSet, calendar 2022 earnings growth is projected to be 9.0%, so the price return for the S&P-500 should be closer to its long-term average.”

 

(Bill) MILLER PARTNERS: 

1. “The market is fairly valued with some sections still cheap; it is very cheap as compared to 1999.”
2. “Big technology, including Amazon, still offers value.”

 

DWS GROUP:

1. End-of-year S&P target = 5000
2. “Stock market rise in 2022 will be surported by a combination of sustained earnings & economic growth and a contained rise in rates.”
3. “This is not the 1970s; we think the best way to protect against inflation is simply to own the best Quality businesses.”
4. They are overweight financials and healthcare.

 

FIDELITY:

1. “Stocks are poised to deliver positive returns in 2022, but likely not as much as they did in 2021 as earnings growth slows and the Fed tightens.”
2. “Growth stocks could continue to outperform value if interest rates stay low.  They have been leading the market since 2014.”
3. “The secular bull market that begain in 2009 will continue, driven by demographics, low rates and strong cash flows from the ‘big growers’.”
4. “As 2022 begins, we expect the markets to mean-revert back to trend-like-growth, and for the Fed to take the first steps on the road back to a neutral monetary policy.”
5. “Most economic indicators suggest that the U.S. remains in the mid-cycle phase (of the market cycle) following the early recovery from the pandemic in the second quarter of 2021.”
6. “Convertible bonds, floating-rate bank loans, floating-rate preferred stock, dividend-paying stocks (especially of gold producers), master limited partnerships (MLPs) and real estate investment trusts (REITs) are among the investments that may offer income opportunities in 2022.  Professional investment managers have the expertise necessary to identify mispricings and to manage the risks associated with these higher-yielding securities.”

 

JEFFERIES:

1. End-of-year S&P target = 5000
2. “Growth is not likely to be a problem in 2022 as the U.S. consumer, corporate, government and possibly even the banks unleash their spending.  But base effects work against earnings and high valuations meaning that market multiples may finally matter.”

 

BNP PARIBAS:

1. End-of-year S&P target = 5100
2. “We expect to see some compression of price/earnings ratio multiples as rates rise.  However, strong earnings growth could still translate into a 10% total return.”

 

WELLS FARGO:

1. End-of-year S&P target = 5300
2. “We expect supportive monetary policy along with public and private spending to push equity markets higher through the entire year.”

 

BANK of AMERICA:

1. End-of-year S&P target = 4600
2. “Unfortunately, we see a lot of similarities between today and 2000, the tech bubble peak.”
3. “Drivers for our lower than consensus stock market target are a higher discount rate, U.S. GDP primacy vs. China, rising capex (business costs), slowing consumption of goods and the impending end of stock buybacks (corporations buying their own stocks in order to drive up the price).”
4. “Priortize commodities, stocks and then bonds.  We also prefer small-caps versus large-caps and value stocks versus growth.”

 

NEW YORK LIFE INVESTMENTS:

1. “Recent market jitters are being caused by the potential move by the Federal Reserve to remove some accommodation from the market faster than investors had anticipated.  Increased inflationary pressure is likely to mean more rate hikes in 2022 than currently expected, creating more market risk and lower market returns than in 2021.”

 

BARCLAYS:

1. End-of-year S&P target = 4800
2. “We see modest upside for equities in 2022 because of persistent supply chain woes, reversal of goods consumption to trend, and a China hard-landing as a tail risk.”

 

MORGAN STANLEY:

1. End-of-year S&P target = 4400
2. “We have a bearish outlook.  The biggest driver of the dip will be a higher-rate environment, however, defensive Quality stocks should hold up.”
3. “We expect the S&P-500 to be range-bound & volatile and for bond returns to be negative net-of-inflation.”
4. “Investors should move toward careful asset picking and away from owning passive index funds.”
5. “Strong nominal GDP growth should continue to provide plenty of good stock market opportunities for experienced investment managers.”

 

(Consuelo Mack) WEALTHTRACK:

1. “For 2022, we need to recognize the high amount of stimulus that is still flowing through the system.”

 

BLACKROCK:

1. ‘We expect another year of positive global stocks returns coupled with a down year for bonds.  We see inflation settling above pre-Covid trends; we’re going to be living with inflation.  We favor equities over fixed income as a result.”
2. “We expect the Fed to start rising rates in 2022, albeit not as soon as the market is currently pricing in.”
3. “Climate change risk: We favor sectors with clear transition plans and stocks such as technology and healthcare because of their relatively low carbon emissions.”
4. They suggest holding U.S. stocks over other regions and U.S. TIPs (Treasuries that are inflation protected) over all other bonds.

 

NEUBERGER BERMAN:

1. “There will be persistant inflation; expect falling bond prices.”
2. “The economy is going to remain strong in 2022.”

 

FUNDSTRAT:

1. End-of-year S&P target = 5400
2. “Base case, the rally in 2022 still has a lot of fuel.”
3. “Stocks will be lower by 10% by mid-year, but will be higher by end-of-year.”
4. “Big tech will lead the way.”

 

INVESCO:

1. “Inflation to peak by mid-year with the Federal Reserve still raising rates in the back half of 2022.”
2. Invesco expects strength in:  global large-cap growth & Quality equities, especially in the sectors of technology, healthcare, consumer staples and REITs.  They favor long-duration Treasury-bonds (20-30 year) as well as short-duration floating rate bank-loan instruments.

 

WISDOM TREE:

1. End-of-year S&P target = 5000
2. “Today is very different from 2000.  Valuations are much lower and interest rates are also much lower.”
3. “Despite inflation, long dated bonds (20-30 year) are in demand as hedge instruments.  The long-term bond rate might stay below 3%, but short-term rates will have to go up more aggressively.”
4. “Throughout history, dividend yields on stocks, although they’re not guaranteed like bonds, match and in fact exceed the rate of inflation.”
5. Higher interest rates argue for the value sector.”
6. “Inflation is the exact inverse of the price-of-money.  You cannot ignore the supply of money when you talk about inflation.  The Fed must pay attention to the supply of Dollars that it is putting (‘printing’) into the economy.”
7. “Looking into 2022, we expect the consumer to remain a solid contributor toward growth.”
8. “Inflation is transitory.  While the October 2021 CPI print of +6.2% may not be where inflation ends up, we do feel that the “final” number will still be well above the Fed’s plus-2% threshold.”
9. “Earnings growth should bode well for equities in 2022.  We do believe that Quality stocks (strong earnings, balance sheets and cash flows), which has been an underappreciated risk factor for most of the past 2-3 years, may become increasingly important as we move through the year.”
10. “We expect commodities to continue to rally.  Furthermore, we expect investors to regain interest in real assets and non-traditional income sources such as MLPs, REITs, covered calls and preferred shares.”
11. “Dollar bulls should continue to be rewarded.”
12. “Stocks over bonds; USDollar over other currencies; bullish on the broader commodity complex; small-cap stocks may catch a bid.”

 

VANGUARD:

1. “While the economic recovery is expected to continue through 2022, the easy gains in growth from rebounding activity are behind us.”
2. “Although a return to 1970s-style stagflation is not in the cards, we expect inflation to remain elevated across developed markets as the forces of demand and supply take some time to stabilize.”

 

FIRST TRUST:

1. End-of-year S&P target = 5250
2. “The budget deficit will be much smaller in 2022 than in the past two years.  That will generate a short-term headwind for growth.  Meanwhile, more businesses should be getting back to normal with small business start-ups gradually replacing businesses that were killed off by overly strict COVID rules.”
3. “We haven’t had a 10% correction in 2021, and, although we never try to time the market, we wouldn’t at all be surprised by one happening at some point in 2022.”
4. “There are clouds on the horizon, but not overhead.  Equities have further to run.”

 

FRANKLIN TEMPLETON (via Brandywine, Clarion Partners, ClearBridge, Royce and Western Asset):

1. “While they may not rise to the extent of 2021’s record-breaking year, corporate profits in 2022 should continue to surprise to the upside; we remain constructive on risk assets.”
2. “Consumers, in aggregate, possess an enornous amount of savings ready to deploy as the economy continues to normalize.  Consumers may be shifting their consumption (away from consumer goods) back to consumer services after a nearly two-year hiatus.”
3. “Inflation will retreat in 2022; the surprise could be a bigger drop than expected, but we still favor commodity-driven sectors like energy and basic materials.  With respect to inflation, what’s interesting is how technology stocks have fared.  Tech companies generally have high gross margins, which provide a lot of flexibility in terms of absorbing (inflationary) cost pressures.”
4. “We’re placing an emphasis on large-cap U.S. Quality stocks.”

 

YARDENI RESEARCH:

1. End-of-year S&P target = 5200
2. “Faster Fed taper than expected because of higher than expected inflation.”

 

JP MORGAN:

1. End-of-year S&P target = 5050
2. “Most of the equity upside should be realized during the first half of the year when monetary and fiscal policy tailwinds will be strongest.”
3. “We expect international equities and emerging markets and cyclical market segments to outperform.”

 

OPPENHEIMER:

1. End-of-year S&P target = 5330
2. “Continuation of the stateside economy and positive corporate revenue & earnings trends likely to persist as the U.S. economy moves out from under pandemic oppression toward the next new normal.”
3. “Monetary policy at the Federal Reserve to remain supportive of the U.S. economy as the central bank tapers to end its monthly bond buying program over the course of the next three to six months.”

 

LEUTHOLD GROUP:

1. End-of-year S&P target = 5000
2. “We are way overdue for a correction, and we’re going to get one of perhaps 15%.” (NOTE:  One month ago they saw a big pullback during the first half of the year with an end-of-year target of 5500, but now they are calling for a big pullback during the second half of the year with a mid-year target of 5400 and a final end-of-year target of 5000.)
3. “Spend time re-positioning your portfolio now.”
4. “Don’t run away from stocks.”
5. “Inflation will moderate to 3%; bond yields to stay below 3%.”
6. “We expect small-caps and mid-caps, cyclical stocks and international markets to emerge as the big winners by the end of 2022.”

 

CREDIT SUISSE GROUP

1. End-of-year S&P target = 5200
2. “We have raised our end of year target from 5000 to 5200 because we expect robust economic growth.”
3. “Consumer spending should remain strong as the employment rate drops further, accompanied by higher wages.”
4. They are overweight energy, materials and consumer sectors; market weight technology; underweight financials and healthcare.

 

UBS:

1. End-of-year S&P target = 4850
2. “Strong growth in the first half of the year; weaker in the back half.”

 

RUSSELL INVESTMENTS:

1. “2022 will be a year of moderation after the excesses of 2021, although there will still be above trend growth globally.”
2. “The spike in inflation will be transitory, so there will be no rate hikes in 2022.”
3. “China will have a deep downturn.”
4. “Europe and the UK stronger than in 2021 and value stocks to excel in these regions.”
5. “We expect the USDollar to weaken against all other currencies, especially the EURO.”  (The overwhelming institutional view is for a strong or sideways USDollar.)

 

DOUBLELINE:

1. “Rough waters for stocks during the second half of 2022.”
2. “Inflation to be elevated until mid-2022.”
3. “Emerging markets to outperform as the USDollar starts to decline; gold price to go up.”

 

LPL RESEARCH:

1. End-of-year S&P target = 5100
2. “The economy moves more into mid-cycle with both consumers and corporations creating bullish conditions.”
3. “We favor the U.S. over other regions.”
4. “10 year bond at 2% by end-of-year.”
5. “Inflation settles back to 2.5%.”
6. “We remain positive on industrial metals but neutral on gold and oil.”
7. “Best sectors are financials, industrials, REITs and healthcare.”

 

RIVERFRONT:

1. “U.S. stocks will generate positive returns in 2022, but with more volatility.”
2. “We are overweight U.S. stocks and underweight fixed-income (bonds).”
3. “The biggest risk is not the pandemic, but rather interest rates rising faster than expected.”

 

RICHARD BERNSTEIN ADVISORY:

1. “Unlike during much of the past decade, the U.S. is now importing inflation.  The very early-stages of a wage-price spiral appear to be forming.  Some have suggested that technological innovation has curtailed inflation, but productivity data strongly refutes that assertion.”
2. “2022 will likely be a year of slightly slowing nominal economic growth and earnings growth, but nominal growth could still positively surprise during 2022.  If nominal growth begins to accelerate, then the more traditionally cyclical sectors (consumer discretionary and industrials and financials, etc.) could outperform and consumer staples might be an interesting sector as a (other end of) barbell to nominal growth-sensitive sectors.”
3. “Treasuries were the worst asset class during the (inflationary) 1960s and 1970s.  They provided low returns and high volatility.  Small-cap value stocks, an asset class generally ignored today, were a very good performing asset class as inflation ramped up.  They provided higher returns and lower probabilities of losing money than did Treasuries over the 20-year period.”
4. “For fixed-income, we continue to believe that buy-and-hold strategies (for bonds) will underperform and we are focusing on the flexible management of quality, credit and interest rate shifts.”
5. “2022 could be the beginning of the end of easy diversification.”
6. “2022 could be the continuation of the early stages of a new inflation paradigm.”

 

COMMONWEALTH FINANCIAL NETWORK:

1. End-of-year S&P target = 5000
2. “As we enter 2022 the question is, can this momentum continue?  The answer is yes.  The improvement will likely slow as we approach the new normal.  But this existing economic and market momentum should be enough to keep the country growing and markets rising throughout the year.”
3. “2022 will be a year of growth.  The economic problems are real:  inflation, labor shortages, rising interest rates, political dysfunction, and more.  But this scenario is normal and those problems will be accommodated.  Even the medical problems, while likely to continue, are also just part of the new normal.”

 

RBC ROYAL BANK:

1. End-of-year S&P target = 5050
2. “We are bullish because of cash deployment trends, normalized earnings revisions, contrarian bearish individual investor sentiment and a fiscal policy that still tilts supportive with corporate tax hikes less of a threat.  The onset of tapering and proximity of Fed hikes have kept investors uneasy, but stocks normally post good gains during interest rate increases as long as the economy is strong enough to handle it.”

 

DEUTSCHE BANK:

1. End-of-year S&P target = 5000
2. “While the Fed may become more aggressive in tapering its bond purchases, potentially completing the process in March instead of June, we expect that the Fed will still be ‘dovish’ on rates in 2022.  The Fed will raise rates just once next year, which is below consensus.”

 

CITI GROUP:

1. End-of-year S&P target = 4900
2. “There probably will be some elevated volatility around the potential tightening of Fed Policy, but investors have appeared encouraged.”
3. “We are mid-cycle, so we like Quality stocks and dividend-growers and healthcare.”

 

ISHARES:

1. “Robotics and artificial intelligence technology should grow in response to ongoing supply chain bottlenecks and wage inflation.”

 

STANCHART (Standard Chartered Bank):

1. “We are overweight China stocks and Middle-east stocks.”
2. “We do not expect the Federal Reserve to raise rates until September of 2022.” (NOTE: Their thinking may be that the Fed waiting to raise interest rates would shift relative strength away from the United States early in the year.)

 

BMO:

1. End-of-year S&P target = 5300
2. “An accommodative Fed, excessively low interest rates, potential peaking inflation & supply chain fears, and positive earnings growth remain a very good recipe for equities.”

 

 

2021 CHARITY:  As mentioned last month, MarketCycle takes a good-sized chunk of the money received from the management fees of client accounts and gives it to one charity each year.  This year a check was written directly to the Turpin Siblings from Diane Sawyer’s ABC Special:  Escape from a House of Horror.  Since the money source originally comes via our clients, I’d like to thank all of them for this privilege… this is a group effort.

 

FOX MOUNTAIN RETREAT:  Clients are allowed to stay in our Airbnb for 3 days at no charge (and bring a group of up to 5).  I’ve not met roughly 90% of my global clients, so this is a chance for us to meet… this peaceful retreat house is on our property in Charlottesville, Virginia.  The retreat house is also available via Airbnb but clients must contact me directly and I will x-out the dates at Airbnb so that nobody else can book them.

WEBSITE:  https://FoxMountainRetreat.com/

Airbnb listing:  https://airbnb.com/h/FoxMountainRetreat

 

 

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MARKET CYCLE  —  HEDGE FUND  —  DUAL MOMENTUM  —  TREND FOLLOWING  — LOW VOLATILITY

 

A price chart is a sequence of prices ploted over a specific timeframe; information is shown at the top, prices on the right and time at the bottom.  A price chart can plot the price of almost anything, including the cost of a head-of-lettuce, over any selected period of time.  Shown below is what you want to see on a stock price chart.  CSQ is one of our portfolio holdings and it has an almost identical price chart to our other closed-end-fund (CEF) holdings of RNP and ACV.  Over just the past 12 months, CSQ started at a price of $12 per share and it is now $18.62 per share for a 12 month gain of roughly 55% and it also paid 5.5% in interest payments directly into client accounts.  This was accomplished despite having lower risk than does the S&P-500.  You want to see chart price lines moving up from lower left to upper right.

 

PDBC is our commodities fund.  We picked this particular fund because it does not exploit animals as commodities and it sometimes pays interest (I’ve seen the yield as high as 2.5%) and it has no complicated K-1 tax form.  And we like this type of fund because it merely sets its value based on the price of commodities and it does not participate in the actual mining, drilling, lumbering or basic exploitation of the environment.  Notice how PDBC moves differently than CSQ so it helps to smooth out the path of profits; sometimes when stocks and bonds drop, PDBC will go up.  PDBC has gained 70% in the past 12 months (try beating this via flipping houses!):

 

SWAN is an example of a protective portfolio asset that MarketCycle also holds.  Like CSQ, it also moves from lower left to upper right, which is good, but it was less profitable during the past 12 months because it generates most of its outperformance when markets correct, and there has not been any meaningful stock market correction during the past year.  Still, it is doing its job while making another 20% in profit in just 12 months (similar to the gains on our gold-bullion trust holding).

 

From CNBC as reported in the October 29, 2021 issue of The Week:  “The wealthiest 10% of Americans now own 89% of all U.S. stocks held by households, a record high.  The top 1% of all Americans gained more than $6.5-trillion in the stock market since the Covid-19 pandemic began, while the bottom 90% made $1.2-trillion, according to the latest data from the Federal Reserve.”   

 

On Tuesday October 19th, the stock market suddenly became very strong again.  Very strong.  We had predicted a September pullback and MarketCycle used the opportunity to add to account positions with new client money; we did so on the exact day of the pullback bottom and the stock market has marched straight up from that day to today.  MarketCycle recently sent out a private Client Market Update with a list of our near-term predictions and they all proved to be correct except for our call for bitcoin to move lower.  Bitcoin rose instead when it got wind of the news that a new bitcoin ETF (BITO) had been approved by the SEC and was about to come out (and 8 similar ETFs are in the works).  A chart of bitcoin will be presented further below.

I have to use several services to gather and assemble all of the information that I need each day, but I usually present StockCharts in my blogs because the charts are so clean.  In March of 2020 (when we were still at point “A” on the chart below) I drew the new upper trend channel line (indicated by “B“) of where I thought that the stock bull market was headed; at the time this line was just sitting all alone out in chart-space.  I wrote repeatedly about this by saying that the S&P-500 would soon head up to between 4500 and 4600, depending on how rapidly it moved higher; it ultimately hit 4550 before pulling back (right in the middle of my prediction range) and the S&P-500 re-touched this 4550 number again on Thursday October 21st and then closed at a new record high.  If my predictions remain on track, we will have over 1000 new record highs over the next 8 years.  And we should expect the S&P-500 to hit 4700 before the Spring of 2022.

So, the S&P-500 will likely churn higher, moving along the bottom side of the “B” line shown below for the next couple of years.  It did the same thing in 2013 & 2014.  The bull charges ahead!

 

The all important S&P-500 Advance/Decline Price Line (which shows the breadth of market participation… it reveals whether a market is running on all cylinders), as it has done since March of 2009, it is still saying that we are in a Secular stock bull market.  The S&P-500 is superimposed as a grey line:

 

In the near-term, all U.S. stock indexes remain above their individual short-term trendlines (blue dashed lines below).  A trendline is just a line, usually at around 45 degrees, that indicates market direction and once established the markets tend to want to touch the line repeatedly.  Small cap stocks (labeled as $RUT below) are showing weakness but this is only natural as we now leave the early-cycle and enter the mid-cycle portion of the current market cycle.  The pundits on the financial sites are out promoting “cheap” small-cap stocks, but sometimes certain stocks (or even entire categories of stocks) are cheap for a reason.

 

Market strength:  The United States continues to lead in strength relative to all other regions of the globe.  The U.K. is also surprisingly strong.  The most recent stock bull market started in late March of 2020 and it still has a long way to go before it reaches the end of this market cycle.  We have left the early-cycle and are entering the mid-cycle where stocks will continue to plow ahead, but in a slightly slower and more choppy manner.  $3.5-trillion is still sitting on the sidelines in the United States; it is waiting to go into the markets or to be spent in the economy.  Low interest rates plus strong cash levels = stocks to go higher.

Market weakness:  The only major countries showing measurable current economic distress are:  Canada, Luxembourgh, China, Argentina and Brazil.

 

Fixed-rate bonds often move in the opposite direction of stocks.  The main reason that bonds are held in investment portfolios is because they usually go up when stocks go down.  The most likely near-term direction for bonds is lower and perhaps down to the red dashed line on this next chart.  So, they will likely move down as stocks move higher.  Generalized fixed-rate bond weakness will likely persist for the next 15-ish years.  Roughly speaking, for each & every 1% rise in bond yields, the value of your fixed-rate bonds will go down by 10%.  Ouch.  We are just now coming out of the biggest bond bubble in the history of the universe; it was 40 years in the making.

 

Inflation means that the prices of everything that we consume, both goods and services, are heading higher.  Inflation is caused by supply chain disruptions and/or by money printing.  14% of all of the USDollars ever printed were created during the past 12 months.  The good news is that wages also generally head higher during inflationary periods (although automation and robotics will ultimately keep a lid on the wage gains of real people).  MarketCycle’s system of indicators were the first that I know of to pick up on the current inflation story.  We saw it way back in March of 2020 and now it is the only story that anyone is talking about.  Our indicators tell us that inflation persists.  Although we may be wrong about this, over the longer term MarketCycle expects (roughly) three temporary inflation spikes, perhaps spaced two years apart, before inflation then just steadily grinds higher during the 2030’s.  We are experiencing the first inflation spike right now. 

 

Two great books on inflation & deflation:

1. Inflation Matters… by Pete Comley (Pete is a great guy that lives in the U.K. and he is a reader of this blog)
2. The Great Devaluation… by Adam Baratta

 

High inflation and falling bonds:  People that hold the typical 60%-stock/40%-bond portfolios (60/40 is the most common portfolio mix) or that simply hold a template of mixed assets (such as the ones that companies like Wells Fargo put out) or that invest in “can’t fail index ETFs & mutual funds” are all going to get punished going forward and for the next several decades.  Starting right now is the time that alpha-level professional help will really pay for itself.  My prediction is that the S&P-500 will no longer lead; you can no longer just “buy the market.”  Going forward, sector and factor selection for outperformance becomes of the utmost importance.

 

Interest rates?  MarketCycle has discovered how to accelerate the same data that the Federal Reserve looks at so that we know, ahead of them, what their next move will be.  Our indicators just changed to show that the Fed could now raise rates at any time.  The likely path would be to start with visible tapering in November, although they have already been secretly tapering for months.  Certainly there will be rate increases in early 2022, if not by late 2021.

 

Bitcoin is getting closer to forming a new price top.  Parabolic tops always correct rapidly once they start.  Nothing can go straight up forever and the faster & higher it rises now, the faster & lower it will fall in the future.  IMO, it should head lower sooner rather than later, perhaps down to 27,500 and this would be a greater than 50% loss, but it could drop down to any of the red dashed lines shown below, including all of the way down to 7000.  Charting bitcoin is problematic; this is an ‘asset’ that is actually only a ‘digit’ saved in one’s computer, so it ultimately could go as high or as low as the majority of (mostly young) traders imagine.  It is not really a usable currency and it will likely never be one simply because it is way, way too volatile and therefore offers no stability; currencies must hold a relatively stable value.

 

Bitcoin is an asset that consists of nothing tangible when almost every other investment asset represents something real and tangible, stocks are partial ownership in a corporation and gold can be held in one’s hand, but if bitcoin dropped to $7000 again I would be a buyer (or perhaps buy ethereum).  Cathie Wood of ARK Investments optimistically believes that “bitcoin will go to $500,000 in 5 years.”  The much respected Jamie Diamond of JPMorgan pessimistically called it “a fraud worse than the tulip mania of the early 17th century.”  Warren Buffett says that “it has no unique value at all.”  Donald Trump says that “it is built on a foundation of thin air.”  Elon Musk and Bill Gates both believe that Internet mining for bitcoin is destroying the environment because of the truly gigantic energy requirements involved in the process.  But the financially savvy Ashton Kutcher recently stated that “a revolution is taking place.”   

The IRS is cracking down on cryptocurrency profits and many people are going to be receiving heart-stopping letters in the mail.  They warned us but nobody listened.  And if President Biden replaces Federal Reserve Chairman Jerome Powell (who dislikes bitcoin) with Janet Yellen (who hates bitcoin), she may outlaw or regulate its use and then institute an official Federal Reserve cryptocurrency; according to Ray Dalio, recently retired CEO of the world’s largest hedge fund, there is a decent chance of this actually happening.  Confusing, ain’t it.

 

And now for some levity:

 

 

That’s it; thanks for reading!

Please remember that MarketCycle has only one focus:  We carefully manage people’s investment accounts, positioning the portfolio for where we are in the market cycle (early, middle, late, recession) and constantly watching for increasing risk levels and moving to hedge (protect) accounts when risk levels rise.  We have clients all across the globe.  We’re here to help you, the process is easy, and our fee is remarkably low considering how correct our predictions and positioning are (I always say that we pay for ourselves).  The first 3 months are free.  There is a CONTACT TAB on our website.  Let us help you.

We have a second (paid member) website, MarketCycle Wealth REPORT, that offers weekly advice and it is available via the link on this webpage.  We now have a new REPORT section specifically for European and U.K. subscribers.

 

 

MARKET CYCLE  —  DUAL MOMENTUM  —  TREND FOLLOWING  —  LOW VOLATILITY  —  HEDGE FUND