Wile E Coyote’s Gravity Lessons

MarketCycle Wealth Management

 

 

Posted on January 20, 2020.      When I was a kid, and unlike today, cartoons were works of art coupled with smart humor.  I remember repeatedly watching Wile E. Coyote slowly chasing the Road Runner up a steep incline, to then pass him and overshoot, resulting in a fall down a steep cliff face.  Of course, he got back up, still intact; then they did it all over again as some sort of perpetual cycle.

For several months now, and despite the presence of heightened risk levels, I’ve been writing about the possibility of a “melt-up” in stock prices.  This happened in late 2017 (and the market eventually dropped almost 20%) and it appears to be happening again.  And who’s doing all of the frantic buying?  Once again it is inexperienced retail investors that are late to the parade, as well as hedge funds… and unlike institutional investors, the majority of ‘sophisticated’ hedge funds appear to be run by imbeciles.  Sorry, but it’s true. 

We have to remember that one of the basic laws of investing is that excesses in one direction (melt-up) always lead to excesses in the opposite direction.  

Right now investors are chasing the stock market up a steep incline.  It will have the same result.  As I often tell clients, the stock market takes an escalator up and an elevator down; it slowly climbs a “wall of worry” and then plummets off a cliff; it rises slowly and then falls rapidly… and this always occurs when the majority of investors least expect it.  In a melt-up it sprints-up.  Just like Wile E Coyote, markets always fall after running up the steep incline, but we always forget the ending even though the ending never changes.

Even without a concurrent economic recession, we are likely to get a big drop sometime in 2020.  Investors must be prepared in advance because gravity always wins.  MarketCycle is still bullish on stocks, and especially bullish about U.S. stocks and especially longer-term, but the current high risk level continues to warrant the holding of protection within investment accounts.  Right now, investors need to be willing to give up a smallish portion of potential “melt-up” gains in order to protect their hard earned money from the inevitable opposite result.  And when the next big drop is over, then investors will need to use quantifiable data to determine if it is a safe time to remove any temporary protective assets from investment accounts.

Remember, a big drop (bear market) does not require a concurrent recession and it will arrive when the majority of investors believe that it simply cannot happen at all this time around… and we are almost at that precipice.

MarketCycle has had a lot of new global clients coming on-board (and current clients adding additional money to their accounts).  The question is always the same:  “The market is at new record highs, is it safe to begin investing now?”   The answer is this:  “If accounts are appropriately hedged against a near-term market fall during today’s higher risk scenario, then yes, of course it is safe on a relative basis… regardless, between now and 2029, we are likely to see 1000 new record highs.”   So far during this advancing late cycle, MarketCycle has been capturing around 75% of the up day profits (which is good enough) and nearly 0% of the down day losses (which allows for sound sleep at night).

When the Dow was still at 9000, I bought the domain name of “Dow80000” with the year 2029 in mind; I still stand by that prediction.  Anyone without an investment account will regret not taking advantage of this last great bull market of our generation… and it still likely has almost a decade to run.  But how do you play safe?  The idea is to hedge during high risk periods by holding some protective assets that are bullish in their own right (but not by shorting the market) and then to fully protect during full blown economic recessions.  But if you are not eventually very bullish during actual lower-risk bull markets, then you are not using logic to your advantage.

 

One of MarketCycle’s least accurate (and too early) indicators is based on investor sentiment.  Basically, when all of the passengers on a boat run to one side (too bullish) then the boat tips over.  We are presently getting closer to a bigger correction as the stock markets continue their melt-up.  This particular indicator offered no warning in 2018 because the big 20% correction was caused by President Trump’s Trade War rather than too many people being excessively bullish at the same time.  But as I said above:  “Excesses in one direction (melt-up) always lead to excesses in the opposite direction.”

 

 

 

SUMMARY:  MarketCycle Wealth Management has been bullish since April 2, 2009.  We’re still bullish, and the Dow naturally wants to climb toward 30,000 since it loves round numbers, but our proprietary indicators predict the likelihood of a bigger than normal stock market pullback being in the works.  To repeat for the third time:  “Excesses in one direction (melt-up) always lead to excesses in the opposite direction.” 

UPDATED:  On February 20, 2020, economic recession probabilities 6 months out are now @ 25%, higher than at any time during the past decade.  Only when our indicators tell us that risk has abated will we remove our currently held protective assets.  We continue to perform quite well, so I’m in no hurry to change anything.  Simply put, MarketCycle’s near-term goal is to avoid participating in the next cliff fall.

 

 

 

Highly recommended (Netflix, 1.5 hours) documentary on improving one’s health and fitness through dietary changes; good for those who are not adverse to listening to what might be new concepts:   The Game Changers 

 

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MarketCycle Wealth Management | Stephen Aust
MarketCycle Wealth Management, LLC is a Registered Investment Advisor. Information presented is for educational purposes only, is not considered an individualized recommendation or personalized investment advice, may not be suitable for everyone and does not intend to make an offer or solicitation for the sale or purchase of any securities. All investments involve risk and unless otherwise stated, are not guaranteed. Past performance or performance charts are not a guarantee of future performance. Portfolio performance charts are shown net of fees so the management fee, brokerage fees, trading fees and ETF fees have already been subtracted. Current performance may be higher or lower than that shown and differing accounts may show different results. Investment returns and principal value in client accounts will fluctuate. All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Be sure to consult with a tax professional before implementing any investment strategy.