Churn Time

"When it comes time to buy, you won't want to."

For those yearning for a fall correction, and a buying opportunity, be careful what you wish for. It's here, and it's ugly.

Although yesterday saw a face-ripping, late-day bounce in the popular growth stocks, the broad market was weak. Bottom fishing past favourites, so soon after a sell-off, is a troubling sign of the persistence of investor complacency. For that reason alone, I don't think the bottoming process is complete just yet. We need more fear.

And for those looking for a smooth rotation into value, small cap or emerging markets, the news couldn't be worse. Those trades all rely on 'good' news replacing 'bad'. With Washington in complete disarray and distracted by an ideological battle over a replacement for RBG on the Supreme Court, the already faint hopes for a renewed fiscal support package are evaporating. The re-acceleration of Covid virus acquisition rates following the re-opening of many economies have the authorities (BoJo, I'm looking at you!) sheepishly back-tracking. And now, the rising time gap between a vaccine approval and its actual widespread adoption is, in itself, generating uncertainty.

So much for a good news environment seamlessly replacing the bad. Consequently, the transition of leadership in markets is now likely once again being delayed. A choppy, churning, corrective phase is the most likely scenario. It will be hard to trade, let alone invest prudently, during the next fews months. With the Fed Chairman Jerome Powell having run out of monetary bullets, he has been reduced to shamelessly begging for fiscal back-up from politicians, most of whom are blithely ignorant of the risks to the economy from a lack of concrete action of pandemic relief.

After writing all that, I don't want to buy this market. But didn't I just say, "when it comes time to buy you won't want to?"

Oh, and here's just a short list what we need for a resumption of the broad-based bull market run:

A renewed fiscal support package and

stable, effective policymaking from the U.S. Administration and Congress.

Pro-growth global trade initiatives.

An effective and widely adopted Covid 19 vaccine.

Reduction of defensive positioning in fixed income and haven investments.

Rising inflation expectations, steepening yield curves and lower implied volatility.

Positive progress on income inequality and environmental issues

And, importantly, no other black swans landing on the market pond.

Good luck! I can't see it happening anytime soon.

Having said all that, the massive level of stimulus provided by the lowest 'real' interest rate environment in history means the path of least resistance is still up for financial assets. At some point, "buy the dip' will be the right strategy.

I'm not advocating for a quick return to the speculative summer markets of August, but for a period of 'sorting out' the winners from the losers. Some value stocks are 'buys', but some aren't, just as some growth stocks are going higher and some have already peaked( TSLA?).

As a macro investor, I can't give specifics. That's why guys like my brother-in-law get paid the big bucks. As a PM with an independent brokerage firm, and a fabulous stock picker, he doesn't care about 'the market'. He just buys good businesses at a fair price and holds them until they cease to exhibit either attribute. I'm sure he is licking his chops right now as the froth is being shaken off this market top and some companies are 'on sale'. If you find one, buy it.

The broad averages will likely go sideways as the sorting out process runs its course. Choppy markets are typical after the short-term peak of an overbought but fundamentally sound market. The preconditions of a true bear market, deteriorating growth and tightening financial conditions are just not present.

And if you are gonna wait for all the positives I listed to actually occur, you will be paying a lot more for your stocks. You make your best buys when your stomach is churning.

Pass the Rolaids ... and the blue tickets.

Risk Model: 3/5 - Risk On

The slow-footed risk model I developed has not been much help lately. A whipsaw between the VXV and AAII Bull/Bear components and a relatively sideways XIU is not giving us a chance to trade the swings in the Canadian market. With their hugely overbought levels, the U.S. market were more tradeable - the Nasdaq especially so.

Although the model says otherwise, I'm fully expecting it to weaken on the release of the AAII data this Thursday. Should the VXV stay elevated and the RSI remain depressed, we could see a test of the 200 dma on the S&P500 around 3100 by the end of next week, especially as we get closer to the U.S. Presidential debates and the rhetoric amps up.

Intermarket action is surprisingly positive, with the continuing strength in copper and a muted pull-back in the credit markets. Option activity is also signalling a healthy reduction in speculation with skews returning to more 'normal' levels. This all fits a choppy market environment.