Waiting: Whipsawing Away

For the past 3–4 months, many commentators on TV have been parroting the same sector-allocation theory in the stock market. Chris Perras, Investment Officer, looks at how this “common knowledge” is holding up.

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Chris Perras: Happy Friday. I’m Chris Perras, Chief Investment Officer at Oak Harvest Financial Group. We are wealth management and financial advisor in Houston, Texas. Welcome to our May, 28th, Pre-Memorial Day weekend, weekly Stock Talk Podcast: Keeping You Connected to Your Money. First off, the team at Oak Harvest wants to wish you a happy Memorial Day weekend. We want to thank those who bravely served our great country through military service and lost their lives defending our freedom.

Secondly, I want to apologize in advance for my inability to carry a musical tune with my voice. For those who are sensitive to hearing, just fast forward the next one or two minutes and go to our website and read the lyrics of what is coming. The tune is to Paul Simon’s hit, Slip Slidin’ Away. Here goes the title of this missive and this week’s weekly Stock Talk Podcast is, Whipsawing Away.

[singing]

Whipsawing away

Whipsawing away

You know the more you trade summer

The more stock profits slip-slide away

I know a man

He came from my hometown

He wore his passion for day trading

Like a thorny crown.

He said margin clerk

I live in fear

My love for debt so overpowering

I’m afraid my account balance will disappear

Whipsawing away

Whipsawing away

You know the more you trade summer

The more stock profits slip-slide away

I know a woman

Took on a day trading life

These are the very words she uses

To describe her whipsawing life

She said, a good day

I keep most my gains

She said a bad day is when I trade and lose all the money that I’ve ever gained

Whipsawing away

Whipsawing away

You know the more you trade summer

The more profit slips slide away

And I know a father

Who had a son

He longed to tell him all the reasons

For the bad trades he’d done

He came a long way

Just to explain

He kissed his boy as he lay sleeping

Then turned and traded Bitcoin in the overnight session again

Whipsawing away

Whipsawing away

You know the more you trade summer

The more profits slip-slide away

God only knows

God makes his plan

The information’s unavailable

To the trading man

Others work their jobs

Get paid and save

You’re trading options from your phone

As your profits are slip-sliding away

Slip slidin’ away

Whipsawing away

You know the more you trade summer

The more profits slip-slide away

Well, thanks for listening to that or fast-forwarding it, as I probably would. Market-wise, we continue to trade in a wide band. In fact, as of last night’s close, the S&P 500 stood at a whopping 15 points higher than tax day six weeks ago. For the past three or four months, almost everyone on TV has been parroting the same sector allocation theory. What’s that theory? Long value overgrowth, small-cap over large, international over domestic. Are the masses ever this correct at the same time after 12 months of a consistent trend? Almost never.

Behind the scenes, the bond market is saying that the now widely parroted trade of investors must be long value, not growth. Trade is at an extreme measure and has already started reversing course. The yield curve as measured by the 10 year Treasury interest rate minus the two-year interest rate peaked in mid-March and broke down two weeks ago in most chartist’s world. We’ve been discussing this dynamic almost weekly trying to combat the nonstop dire warnings by TV commentators of runaway inflation.

The real-time inflation rate as shown by interest rates that you can go out on almost any website to look at, the two-year inflation rate peaked 10 days ago, the five-year inflation rate peaked three weeks ago, and the 30-year inflation rate as measured in real-time peaked four to five weeks ago. The previous momentum trade of long value stocks and long cyclical stocks have for the most part been dogs for the past two weeks. Everyone is huddled on the wrong side of the boat at an extreme and sector allocations.

Things that lead inflation indicators that troughed a year ago in line with our pent-up demand call have now looked like they’ve peaked. Scrap steel, lumber, and agricultural commodities all look lower, not higher now. Conversely, what groups are starting to outperform? Yes, you guessed it, large-cap technology, FANG stocks, biotech, online gaming, secular growth stocks, and even the growth at any price stocks like solar and SaaS software. Those have led the furious rally this week, and when did it happen? It started exactly when 99% of the TV commentators were out there parroting the same theme of buy value and buy cyclicals and stay away from growth stocks.

If you want a true reason for these shifts, look no further in real-time to the shape and momentum in the interest rate yield curve, and the trend in the two components of long-term interest rates. We’ve talked about those two components, the inflationary component, and the real growth component. What you will see is exactly opposite of what you’ve been hearing on TV for the past two months. You will see inflation peaking and real growth beginning to accelerate.

Corn dropped over 10% this week, lumber is already 20% off its insanely high 1,700 blow-off top. Someone, please wake me up when it’s closer to 900 in a month or two, I still need to build my fence. Scrap steel, down, copper, down, wheat, down, soybeans, down. Are we going to start screaming deflation in two to four weeks again like we did last year, or are we going to try to understand that these prices aren’t real long-term prices, that these commodity prices are real for a few weeks and maybe months, and just until, or just in time supply chains catch up?

We are in a secular bull market and rotations happen throughout bull markets, and opposite what the host of CNBC TV show, The Fast Money Halftime Report, Scott Wapner might say, this is a very normal bull market. Moreover, he owes strategist Terry Dwyer an apology for his behavior on Wednesday’s show where he did nothing but berate him for sticking to his forecast.

How normal is this bull market? According to statistics from Merrill Lynch, going back to the Great Depression of 1929, there have been 26 bull market periods without a 20% bear market correction. Since the S&P 500 low last year, this ranks as an unprecedented number 11. Yes, you heard that right. The average bull market return before experiencing a minus 20% decline was up 113.%, which would equate to about 4,770 on the S&P 500 before a 20% correction. Much like Terry Dwyer, we continue to expect the remainder of the second quarter to continue to be choppy at best, and down 5% to 7% at worst.

Once again, round-tripping second-quarter returns on the overall market for a few days late in June is not out of the question. This would not be a disaster as it would mean merely returning to around 3,985 to 4,000s briefly on the S&P 500. before heading much higher to new all-time highs in the second half. What might cause this? I don’t know, but I can guess at the reasons that TV commentators will give after the fact.

My best guess remains, maybe if the Federal Reserve, seeing that there is actually too much liquidity everywhere in the system, and they telegraph discussing the tapering procedure at their late June meeting in setting up a taper timeline at their late July meeting, maybe that would do it. That would happen to coincide exactly with the normal end of the second quarter sell-off into July 4th weekend, and a sharp rally in July, and retest to the summer lows in late July, setting up the remainder of the year for Let the Good Times Roll. Who knows, but that would be the normal pattern.

The Oak Harvest projection for year-end 2021 and early 2002 hasn’t changed, it still remains 4,600 to 4,700. This is not a stretch by historical standards. Far from unprecedented, our targets are merely within the statistical average bull market. In fact, the forward option market thinks that a target closer to 5,000 as possible in the early first quarter of next year. The sell-off we experienced in late last year in 2020 is much closer in behavior to the 1987 stock market crash that merely interrupted an ongoing bull market, and didn’t create a secular bear market or a period of stagnation.

After July 4th and no later than Labor Day this summer, big investors will once again be looking forward to the second half of this year and all of 2022. What they will see is that higher secular growth companies that peaked way back in mid-2020 have stalled for a year, their valuations have compressed, and now they look cheap post their long-term growth and free cash flow profiles. Big investors who were chasing and pushing up value stocks since July of last year will start asking themselves am I paying peak multiples for peak earnings in advance in 2022? We want to be ahead of the curve and not parroting the same old things others are six to nine months after the trend began.

At Oak Harvest, we are comprehensive wealth management and financial advisor Houston. Give us a call to speak to an advisor that can help you plan and craft a financial plan that is independent of the volatility of the stock markets. Our phone number here, 281-822-1350. We’re here to help you on your financial journey through retirement. Have a great Memorial Day weekend, and thanks once again to all those who served in the military.

Speaker 2: All content contained within Oak Harvest podcasts expresses the views of the speaker and is for informational purposes only. It is based on information believed to be reliable when created, but any cited data, indicators, statistics, or other sources are not guaranteed. The views and opinions expressed herein may change without notice. Strategies and ideas discussed may not be right for you, and nothing in this podcast should be considered as personalized investment, tax or legal advice, or an offer or solicitation to buy or sell securities.

Indexes, such as the S&P 500 are not available for direct investment, and your investment results may differ when compared to an index. Specific portfolio actions or strategies discussed will not apply to all client portfolios. Investing involves the risk of loss and past performance is not indicative of future results.