Are We There Yet?!?! | Stock Talk Podcast

I am Chris Perras, Chief Investment Officer at Oak Harvest Financial Group. First off, the team at Oak Harvest appreciates your support and you tuning into our you-tube channel. If you like our content, please refer us to your friends and family. This week’s podcast title is an ode to the phrase every parent loathes to hear from their children on the way to a great family vacation trip? “Are we there yet”?

Unfortunately, unlike in the 1970’s and 1980’s when parents used a AAA roadmap “TripTik”, or more recently since mobile phones became supercomputers and we use Google maps or Waze to navigate directions, there is definitely, no one precise and accurate roadmap when navigating financial markets short term.

We released our first half 2022 outlook, on December 3rd under the title “Curb your Enthusiasm Yields to a Bull Market Buy”. It can be found on our website at OakharvestFG.com or in video format on our You-Tube channel. Check it out. We hope you become a subscriber to our content.

The summary of our outlook is that our team expected our first “correction” of -10% in the cash S&P500 in the early to mid-first quarter of 2022, round tripping much of the 4th quarter 2021 gains. This includes giving up all the “Santa Claus” rally that we were forecasting for the second half of December.

Well viewers, if you were perfect, and no one is. I mean perfect like selling the EXACT intraday top on January 4th and buying the EXACT intraday low on January 24th you avoided losses of -12.4% in the SP500. Ok, you aren’t perfect trading intraday? You aren’t that precise of a trader Moving most, or all, of your entire portfolio in and out of the markets?

You aren’t the character “Ax” on the showtime “billions” show about hedge funds? You mean it’s the real world and you are human like the rest of us, and “only” (please note sarcasm here), you only sold the end of day closing high and bought everything back at the closing day low?

Well, if you were that good, and no one is, you avoided a -9.2% decline. Viewers, in my view, no one, I repeat no one, is both accurate and precise enough to do either of those things. Get out at the top and back in at the bottom. So I know that the question, for those investors watching what are supposed to be investments in long-term investment portfolios, but who are watching them on a monthly, weekly or daily basis is…are we there yet?

Last Monday, January 25th, during the rapid January downturn we released a special video update on YouTube. Why? Because one, we knew that even though we had been foreshadowing this kind of market decline in the first quarter of the year, investor anxiety was getting high.

And two, many of the indicators that were flashing warning signals to our team back in early November of last year for the first quarter of 2022 were now beginning to flip back the other way and say, short term, the selloff is overdone.

I’ll walk you through a couple of these indicators we’ve discussed in the past here in a minute, but before I do, I want to remind viewers, 1- no indicators are perfect, 2-no one will get you in at the bottom and out at the top, and 3, even though our data is saying much of the short-term damage has now been done, I remind viewers that our team still expects most of 2022 to be highly volatile and choppy. With forward volatility markets priced the way they currently are, 90 to 100-point intraday swings in the SP500, both up and down, are likely for quite some time. If you are a true longer-term investor, it’s probably best not to watch. If you are a day-trader? Welcome to paradise for a while.
2022 should remain materially different than 2020 and 2021. We still expect very high volatility to remain throughout the first few quarters.

The key word here is quarters of volatility. Not just a few days in a row like 2021 or a few weeks in a row like 2020. And it is definitely not a year of no volatility like 2017. It’s likely to continue to look a lot like 2010 and 2018, both Federal Reserve tightening years and both second year, first term Presidential years which I remind investors set the market up for continuations of the bull market late in the year and into 2011 and 2019.

The first few data series that we wanted to review was investor sentiment. These charts were produced by Merrill Lynch and Strategis. Viewers, we know that human behavior in the stock markets is consistent. Many investors, both big professional ones and smaller retail investors now seem to operate under the same behavioral finance model. That’s the Gordon Gecko model in Wall Street, “Greed is good”. Everyone seems to be a momentum investor.

They buy greedily when things have been green for a long time and sell fearfully when things are down. One of my old bosses kept it as simple as this, “green is good, red is bad”. Well viewers, you want to know where he is now? He’s out of business and his shop is closed because he got over his skis at the wrong time and then had to sell when things were bad.

At positive extremes in sentiment and greed like we were having in the 4th quarter, one should reign in their desire and greed and go slow and wait for better times to invest incremental dollars.

Contrary to 4th quarter 2021, right now, sentiment gauges are showing individual investors are no longer bullish. Of course they aren’t, with the SP500 market price cut 12.5% peak to trough in 5 weeks, they are now negative.

We have discussed this contrary indicator many times in the past. This is beginning to lean bullish for the market. Here is the AAII Bullish sentiment chart and it is below 21 which places it near the Covid Pandemic lows, the XMAS Eve bottom in 2018 and at or near almost every other significant market low and buying opportunity the last 10 years. Readings below 25% have been strong buying opportunities this cycle.

On the flip side, investor bearishness is over 47% placing it near the Sept 2020 Presidential pre-election lows. This is also bullish. Readings over 50% have been the golden ticket signaling buy and mold levels this cycle.

A third sentiment indicator is the daily put/call ratio. This is a measure of how many investors are buying puts which provide downside insurance against big moves lower compared to how many investors are buying “call” options to speculate on upside moves higher. This ratio reached its panic level of over 95% a week ago.

The final chart I want to share with you is one of my favorite subjects, volatility. Here is the chart of the volatility “curve”. Traders call it the Vol curve for short.

The lower chart is the shape of the curve on November 5th when we first started messaging about a likely sloppy 1st quarter and potential -10% correction. See the picture. Very steep in projection. Those of you who remember math will say it has a steep positive slope.
In laymen’s terms, this chart is showing you a graphical representation of the cost of insuring your portfolio against rapid moves in the overall market, usually rapid moves down. Back in November, spot volatility was about 16 however it cost you almost 25 to insure your portfolio out through the first quarter of 2022.

So, insurance basically cost you a 55% premium for 4-6 months versus the spot markets. Those insurance salespeople must have been reading from Edgar Allan Poe’s, “Something wicked this way come” as they were pricing for a 9-12% downside move in the markets. Fast forward to late January and the stock markets had decline by over 10% and on January 25th, which is when the top line on this chart was drawn. On January 25th, it was almost 15% cheaper to buy longer term insurance for 3-8 months versus panicking and buying a short-term policy to hedge yourself against an event that was at your front door or already in the rear-view mirror.

That makes no economic sense are reeks of desperation, margin calls or other emotional driven decision making. Many of these recent sharp moves lower were being magnified by computer algorithms and many shorter term traders whose goals and objectives are not in alignment with longer term investors and those saving for retirement. Terms like delta hedging and negative Gamma are common in the circle of traders who magnified Januarys large move down. Longer-term investors should be getting their shopping list ready when these events transpire.

These pricing abnormalities almost always come near shorter term market lows. Do they come at the lows? No one ever knows until after the fact. They generally do not last very long because there are always a lot of insurance salespeople who want to sell you policies at much higher market rates, after the natural disaster has already passed. While we expect the next few quarters to remain volatile, the team here thinks this too shall pass, and the overall sp500 remains in a bull market that should resume its upward path later in the year.

With the continued high realized volatility that we expect for the first half of the year, the investment team at Oak Harvest recommends that you get on the phone and give our Oak Harvest team a call and ask to speak to one of our financial advisors and planners. Set up a meeting and sit down with one of our advisors and let our team craft an individual financial plan and long-term investment allocation that meets your financial and retirement needs first, and your greed’s second.

Give us a call at 877-896-0040 and give our team a chance to help you into and through your retirement years, whether stock market volatility is elevated at around 27-28 as it is now, or its depressed below 10 like 2017. The entire Oak Harvest team is here to help you navigate into and through your retirement years.