Michael Hartnett is So Bearish, He’s Bullish | Stock Talk Podcast

Michael Hartnett is the Chief Investment Strategist at Merrill Lynch.   Amongst all of Merrill’s economists and strategists, he is perhaps the most well followed by institutional and retail investors.  It’s a big title, and he’s followed by 100’s of thousands of advisors and millions of investors.  He’s been around the block for a few decades and seen a few economic and stock cycles.  He predominately uses a data-driven approach.  While too conservative in his second-half 2021 outlook, he was one of the first sell-side strategists to correctly call for a first-half 2022 sell-off for what turned out to be the right reason.  That reason.  Higher inflation and slowing growth.  This is also known as “stagflation” in economic circles.

Late Monday night last week.  Early Tuesday morning, July nineteenth, he released his much-anticipated Global Fund Managers Survey.  Its title, in bold headlines, read, “I’m so Bearish.  I’m Bullish”.  The first sentence of his report read as follows: “The Full Capitulation- July’s Fund Manager Survey shows a dire level of investor pessimism…Expectations for global growth and profits at all-time lows, cash levels highest since the 9/11 terrorist attack, equity allocation lowest since Lehman Brothers collapse, our Bull/bear indicator remaining at “max bearish” levels, Zero, but sentiment says stocks and credit should rally.”  And with that headline, and with those words, after grinding higher since June sixteenth, Tuesday at the open, the markets exploded up, in both price, volume, and market breadth as measured by advancing versus declining stocks.

I am Chris Perras with Oak Harvest Financial Group here in Houston, Texas, and welcome to our weekly stock talk podcast.  Before we get into this week’s topic dissecting Mr. Hartnett’s market call for a rally, which is a follow up to our July first video “Opportunity Knocks early!” And July eighth, follow-on “Opportunity knocks Part 2” videos.  Please take a moment to click on the subscribe button and click on the notification bell so you will be alerted when our team uploads our latest content.  You’ll find the links of those two videos down below in the description.

This is going to be a chart-laden episode because, as frequent viewers know, the investment team at Oak Harvest tries to use data over emotions.  We will repurpose a few charts from the Opportunity knocks episodes, but most come from new sources.  If you want another similar summary of the bullish case in the markets, you’ll find a link to Jim Cramer’s July nineteenth episode reviewing Larry Williams charts in the description below.  We’ve discussed Mr. William’s work in prior videos.

First, professional speculators’ investment positioning, which is a contrarian indicator, is now contrarian bullish.  We gave you this chart on July first.  Here it is again.  CFTC S&P500 futures positioning is as low as it was at the 2016 and 2011 market bottoms.  The market’s subsequent upward moves lasted months and quarters, not just days and weeks.  Remember though, they were not straight lines!

Another positive yet contrarian bullish institutional position is their cash holdings.  Cash levels have risen to 6.1%, up from under 4% last November when the markets topped.  That’s the highest level since October 2001.  Here’s the chart from Merrill.

Yes, 6.1% doesn’t sound like a lot of cash to most people.  However, you have to remember that most of these institutional managers’ performance is being compared against the S&P500 index returns.  The S&P500 index carries no cash.  None, Nada, Zero.  Ever. Vanguard and BlackRock S&P500 index ETFs and mutual funds’ sole goal is to mimic the daily performance of the S&P500 regardless of whether it is up or down.  Each day, Every day.  The only way they do that is by being 100% invested every day regardless of inflows or outflows.   So, when the markets start to reverse higher.  These other active managers, carrying 6% cash, will almost inevitably lag the markets overall returns.  Guess who doesn’t like that.  Marketing and sales departments who sell only investment performance, not comprehensive financial planning, tax planning, or hands-on retirement planning.

Our investment team talks a lot about sentiment and emotions in the markets.  We talk a lot about how one should try to distance themselves from making decisions based on “feelings and pure emotions.”  Instead, we try to find and track measurable data on investor sentiment that leads market moves and investor behaviors.  Here’s an interesting chart from Merrill Lynch that gauges whether investors are taking more or less risk than normal in their portfolios and investments.  As you can see from the chart, 58% of investors are currently taking below-normal risk.  That’s a level BELOW max negativity and positioning during the Great Financial Crisis and Lehman Brothers moment.  Does that make sense given where our economy and employment stand?  Given where individual and bank balance sheets stand?  Not to our team.

On Tuesday, July nineteenth, breadth in the market exploded upward.  So much so that a few brave souls declared the “bear market over.”   The advance-decline of the broad NYSE was 14 to one after an 8 to one reading the prior Friday, option expiration for July.  Data on the S&P500 was equally as broad, with 495 stocks up and ten down for the broadest breadth since the December twenty-sixth Xmas rally in 2018 that started and lasted almost four months.  Both The S&P 500 and tech-heavy Nasdaq reclaimed their 50-day MVA’s, which is a start at repairing the damage to the technical charts that people like to see.

According to market research from Sentiment trader, there have been only 13 times in the modern era that the S&P500 up volume was 87% or more for 2 out of 3 trading days coming off a 52-week low.  In all 13 cases, 100% of the time, the S&P 500 was higher a year later with a median return of 23%.  I like those odds and returns, given what our early July work was saying.

Here’s a similar table from Merrill that shows the returns following 90% up days on the New York Stock Exchange.  This is shorter-term data that traders might like, but it shows the same trend.  The week immediately after these events tend to be muted as the market digests gains; however, looking out to 3 months of trading, the S&P 500 has been positive 80% of the time, with a median return of about 8.5%.

History tells us that stocks do a lot of the repricing work in front of recessions because stocks anticipate slowdowns.  They anticipate peak revenue growth.  They anticipate peak margins.  They anticipate, are things as good as they get?  Is it the Peak or marginal return on cash?  Likewise, stocks also anticipate troughs in fundamentals and troughs in economic momentum.  They bottom in front of the worst of the data, usually by months, not by hours, days, or weeks.

If you look at recessionary contractions as the worst economic data we can have in the market, here’s Ben Carlson’s work on what happened to the stock markets before, during, and after every recession since World War II.

It is the data-driven historical evidence showing investors, that stocks and markets anticipate inflection points, both good and bad.  It should tell an investor, “if you wait to see the whites of their eyes, you’ll be late to action.”

On July first, we published this 30-year chart of the Nasdaq and asked this question, is it time to dump technology stocks, or would it be better to add some back?  The relative performance of the Nasdaq composite had just touched its 20-year trend line.  The index had found support on its 50-month moving average for only the 10th time in 20 years.  We asked, Are you a buyer or seller of growth and tech stocks down here?  Since that day, the S&P 500 index is up about 3%, and the Nasdaq is up over double that at 6.6%.

But to me, as an investor, not a trader, the question to me is, now what?  Do I panic as an investor?  Or, do I try to look forward and think about where the economy and markets will be 6 to 12 months from now, given valuations are now much lower and the masses are finally talking about an economic slowdown or recessions?  Do you skate to where the puck was?  Or do you try to skate to where the puck is likely to be in the first half of 2023?

In our upcoming videos, we will share more of our thoughts on the 2nd half of 2022 and the first half of 2023.  As we do, remember, the market cares about marginal.  It cares about acceleration and deceleration as much if not more than velocity.  Are things going to get marginally better or worse?  Are shipping costs increasing or decreasing?  Are Labor costs, accelerating or decelerating?  And whether we like it or not, socially or as individuals, the stock market has historically liked boring.  It likes slow, sustainable growth.  It has rewarded cautious spending and hiring by management teams because in that environment, you, the shareholder, is rewarded with an incrementally higher percentage of each revenue dollar the company earns.

While volatility looks like it is starting to plateau, and behind the scenes, the tea leaves are starting to say, for the first time since late 2021, that the big, institutional money “Buy the Dip” crowd are looking to return in the upcoming months, our investment team still does not see an immediate plunge coming in market volatility.  We do not see a “V-bottom in stocks.”  So while, as we’ve shown the last few weeks, many of the clouds are beginning to dissipate for investors, expect a few more months of market anxiety.

Many chartists and technicians have 4100 as a level on the S&P500 that is tough sledding to get through.  We too are watching that level on a monthly basis.  On the Nasdaq composite, the interesting level to our team looks like 12900.  Should the markets have monthly closes above these levels, 4100 on the SP500 and 12900 on the Nasdaq, during the next few months, there is a good chance that the FOMO, “Fear of Missing Out” crowd will resurface for the 4th quarter of 2022 and 1st half of 2023.  Behind the scenes, there are early signals that they already have.

Our team here at Oak Harvest knows that the first half of 2022 has been a trying time for those in the equity and bond markets who are not trading oriented.  The Oak Harvest team knows that sharp market moves drive emotions and the urge to make changes to what are supposed to be longer term asset allocations should be worked through with your advisor.

If the ongoing market volatility is making you feel uneasy, give us a call, and schedule a meeting with an Oak Harvest advisor.  Our team does have insurance-based tools that do not have the volatility of public markets.  However, we remind you, that these investments may also have lower long-term expected returns.

At Oak harvest, we think our clients are best served by us helping them plan for their future needs, instead of focusing on the past.  The future and stock markets are always uncertain and that is why our retirement planning teams plan for your retirement needs first, and your greed’s second.

Give us a call to speak to an advisor and let us help you craft a financial plan that helps you meet your retirement goals. Call us here at (877) 896-0040 and schedule an advisor consultation. We are here to help you on your financial journey into and through your retirement years.

I’m Chris Perras, and from everyone here at Oak Harvest Financial Group, have a blessed weekend.

Michael Hartnett is So Bearish, He’s Bullish | Stock Talk Podcast
Michael Hartnett is So Bearish, He’s Bullish | Stock Talk Podcast

Michael Hartnett is the Chief Investment Strategist at Merrill Lynch. Amongst all of Merrill's economists and strategists, he is perhaps the most well followed by institutional and retail investors. It's a big title, and he's followed by 100's of thousands of advisors and millions of investors. He's been around the block for a few decades and seen a few economic and stock cycles.