This August has finally brought a pullback to the market. Of course, various media outlets and fund managers are arguing that such a pullback fits well within seasonality expectations, and are calling for a year-end rally.
As exciting as “joyscrolling” through the financial media and the associated consumption of permabull & -bear opinion might be, there is an old fact that any wise man on the mountain would be happy to share:
It’s an exercise in futility to try to predict the markets. No one knows what the market will do. Not today, not tomorrow, not in a week or a month or a year.
As much as colorful opinions are shared of what a given author is sure will happen, there is simply no way of knowing. We are dealing with a stochastic entity – which means that anything can happen, most things won’t happen, and the outcome of whatever will happen is determined by probabilities (or odds, if you prefer).
He who is handed by the stock market gods the probability distribution curve of what is likely to happen in any scenario has the best chance of positioning himself for the future. Of course, no one has that curve, and even if they did, it would still only give the most likely outcome.
Therefore, the only thing even seasoned professionals can do is react to what’s happening in reality.
They look at the facts, dispense with blinding emotions, and make an educated guess on what’s most likely to happen, based on experience and study of history. They certainly don’t predict.
Looking at the facts:
- A selloff started on July 19th and has found somewhat of a cushioning bounce over the last 7 sessions. The sell-off has been plagued by heavy selling, while the rally is so far only showing feeble and below-average volume.
- Most high-quality leadership has collapsed, experienced significant pullbacks, or entered weak technical positions, and started to reject free price exploration. Few high-quality leaders had emerged in the first place.
- Sector rotation suggests money piling into capital goods, industrials, other cyclicals and defensive plays, itself indicating risk-off sentiment.
- The mega-caps that have biased and driven the popular index rally have started stalling and showing distribution of large share blocks.
- A slew of low-quality stocks have appeared (and most are now rolling over) in the context of what appears to be a market euphoria on AI stocks.
- The risk-on segment of the market, for example reflected by growth-oriented mid- & small-caps (e.g. represented by the IWO) and microcaps (e.g. the IWC), never followed the market rally to a significant degree. Now, it is sputtering even more.
Looking at these, the weight of evidence is shifting against a high probability of an emerging “animal-spirits” market in which money can be made hand over fist.
This is not to say that the popular indices and mega-caps such as Nvidia couldn’t melt up even more than they already have. The predictions of the talking heads and market gurus might yet come true.
A euphoric market tends to ignore negative news, and I’ve previously expressed that it wouldn’t go against the grain of this environment to see all-time new Highs on NASDAQ.
The real question is, can we make money, all things considered, speculating in low-risk opportunities in high-quality stocks? For almost 2 years, the answer to this questions has been as resounding “No”, at least in the US equity market.
