Perilously Poised

It’s been quite some time since I’ve seen a bunch of my indicators all poised on the verge of suggesting a decline in equities, commodities, their sympathetic currencies (the AUD & CAD) and government bond yields.

The relevant word is ‘poised’. A few prices need to hold, alternatively…..if not……prices move to test recent lows and it will be telling if they make ‘lower lows’.

While my focus within client portfolios remains on individual companies, their metrics, valuations and prospects……

there seems to be a ‘growing’ consensus (how’s that for tautology?) that equity markets may move higher resembling a ‘melt-up’.

My instincts may have agreed with this consensus but I need to honour mathematics instead, which are signalling weakness.

It’s also wise to keep in mind that the herd often walks into a trap.

I think a bet on a melt-up is a poorly laid wager in terms of probability and risk versus reward.

More so, as my indicators are marrying up to various ‘extremes’ including the percentage which the S&P 500 is trading above its 200 week moving average. This extreme hasn’t been seen for more than 20 years.

This is not a call for a crash. I don’t spend time on that type of stuff.

I’m raising more cash, protecting capital and putting on some hedges.

My message for fully invested, diversified ‘index huggers, is to at least consider that the ‘fat part of the trade’ may have been had.

or put it another, what risk are you taking to squeeze out an extra 10% of index return?

November 8, 2021

by Rob Zdravevski

rob@karriasset.com.au