Mike Zigmont, author of the Zigmont Report, is a partner at New York-based Harvest Volatility Management, a hedge fund with over $12B 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 it daily shortly after the market close.
The opinions expressed below are my own and do not necessarily represent those of Harvest Volatility Management, LLC.
Sentiment change. Asian markets were about flat overnight, European markets were a little soft in our morning, our premarket was flat-to-down. Ho hum. Things weren’t that interesting. Headlines were quiet and data was uninteresting. Yields across the treasury curve were up about 1 basis point. It really didn’t seem like much of anything.
When the equity market opened, the S&P opened down 10 handles, which isn’t too much. But after four down sessions, I think everyone was wondering when the dip-buyers would finally put a stop to the downside.
It never happened and I think investor sentiment started to turn when the usual rescue didn’t happen. The tape today doesn’t have big drops/gaps in it. It was a steady slip with some acceleration into the close. You can almost see the intraday momentum players riding the tape down. You can see capitulation after certain technical levels broke.
It looks and feels very much like attitudes shifting and nothing more. There was no major shift in the investing landscape today. Capital flow was heavy at 170%. Lots of capital flowed today. Many investors experienced a change in mood *and acted on it.*
If I’m right, this is not necessarily an opportunity for the bulls to jump in and proft (yet again). We were up at record levels and elevated valuations *only because sentiment allowed it.* If the sentiment changes (whether for right or wrong), those valuations are going to go bye-bye and they won’t come back anytime soon.
Is the market finally repricing? That’s the big question. US equities have ignored the past rate hikes and the signaling of future hikes. The market ignored the valuation creep. The market ignored a lot of other things. All those factors didn’t matter then but they do matter now. Why? I don’t know.
Ultimately that’s a philosophical question. For markets, it matters when it matters. Investors are no longer piling into stocks on the long side. They are reconsidering everything now.
We need to figure out how long and how far this will go.
Valuation models aren’t terribly helpful, some say we have 10 to 20% of downside *more* to go to get to average valuations. Yikes. That’s possible of course but I don’t think the market is just going to reset to historical average multiples overnight without a true recession fear. It’ll be a process.
So let’s stick our finger in the air and just say that investors have decided to take some wind out of the sails of equities. Let’s arbitrarily shave 5% off the top before we assume investors rest and re-evaluate. That means 2790….
Lo and behold, we’re there already.
This selloff feels worse than it actually is because we’ve have 3-plus years of calm gains to get accustomed to. I don’t advocate buying this dip because I still dislike the valuation of the market but I think the bulk of the market will see a 5% dip as a true opportunity.
I expect bulls to defend strongly and I expect back and forth for a spell. The bears have won for 5 consecutive sessions, the bulls will chalk up some wins soon.
If down 10% or down 20% is truly in our future, we’re not going there in a straight line so play the game.
My advice is to lighten up any overweight exposure as the bulls make their moves. Stash the cash just in case you get a true dip-buying opportunity between now and year-end.
See you tomorrow,