Mike Zigmont, author of the Zigmont Report, is a partner at New York-based Harvest Volatility Management, a hedge fund with over $10B AUM, offering volatility management solutions to its investor base worldwide. Mike has been publishing his daily newsletter (Monday-Friday) privately for the firm’s investors and his personal contacts in the investment business since 2008, sending shortly after the market close.
The opinions expressed below are my own
Buy the dip. That is the strategy that has worked. That’s the strat that investors employed today. The S&P opened down about 15 handles due to the North Korean missile launch over Japan. This is a pretty big violation of international norms so the geopolitical world is rightly concerned. Markets shared that concern overnight and this morning. However investors have seen this North Korean agitation movie before and they quickly dismissed it over the course of the day. The dip turned into a small rally. Capital flow was surprisingly light at 83%.
What are we to learn from today?
- Investors are almost at the point of ignoring whatever North Korea does.
a) Investors are treating NK words and provocations as bluster and of no meaningful consequence
- General complacency is high and resilient
a) Investor jitters dissipate within hours
- Dip-buyers are waiting in the wings and they are quick to act
a) Even on a slow, low volume day
Some of this confirms what we already knew about the market. The big picture is that the bullish trend is still in place, not because we’re setting new highs like in the late 90’s, but because the downswings cannot persist. The market may stall for a while (which is the current situation) but the support is bulletproof. If flat is all that investors have to worry about, it’s no wonder that the bulls essentially control the tape.
Groupthink is a dangerous thing and the confidence in US equities going up strikes me as groupthink. It’s not delusional because it’s been correct for 8 years. It’s not irrational because the globe is growing and US equity earnings are too. It’s not subject to the usual rules/judgements because the Fed and the rest of the central banks are still friendly to equities.
There are many reasons to be bullish on equities and those reasons are not ersatz.
All that said, the bullishness is so prevalent and deep-rooted that long US equities (or buying any/every equity dips) is beyond crowded.
My conclusion is that this crowded trade will continue to work *and be resilient to most events/news* until something huge happens.
Equities are always fragile when a recession, or a war, or a central bank action changes the fundamental landscape of the world. I think US equities are more fragile to those big catalysts now.
It’s a weird dichotomy. Equities are more robust to all the little things….but will be more sensitive to an eventual big thing.
All this means for us is to either correctly anticipate a big thing and get out of the way…
Or be prepared mentally and portfolio-wise for the bolt-from-the-blue that rattles the market to its core.
On that happy thought, see you tomorrow,