By Colin Symons, CFA
There are two basic ways to invest in the market. You can either stick your finger in the air and invest however the wind is blowing or you can have a process, a lens through which to view a broader spectrum of factors to invest assets. It seems obvious to me which way makes the most sense, but almost any lens has weak spots.
Fund flow data from Bank of America, in the week ended Wednesday, March 13, had the largest weekly equity inflow since roughly a year ago, and the largest daily inflow since September 20, 2018. Why? I'd call it capitulation. People haven't been buying this market, it's been pretty straight up this year, and the quarter will be over in less than two weeks. If you've been cautious, you've been underperforming, so it's time to hit the gas pedal.
How does that tend to work? As you'd probably imagine, at least much of the time, that works out poorly. The last time we had as big a daily inflow, September 20, 2018, the market topped out, hitting the highs for the year. That big inflow week of about a year ago also saw selling. Buying what looks like capitulation has a poor record. The basic reason is that when even the bears have capitulated, there are no more marginal buyers. While my crystal ball, as usual, is broken, at the least I'd say we have high odds of seeing a market top of some duration around here.
We believe in having a process, rather than going the way the wind blows. Our process involves fundamentals and macro. We acknowledge that there are other factors, namely sentiment and technicals that also matter. The reason we don't emphasize them is that they can change very rapidly. Just as we saw last December, today's overbought and high greed can become tomorrow's oversold and high fear. That's fine, but we want a longer window than that.
Macro and fundamentals are painting an ugly picture right now. They have worked over time for us in the past, so should we get frustrated, panic, throw our lens out and capitulate? I sure wouldn't. Our lens was saying the same basic thing in early 2000 and late 2007, despite the strong move up in markets. What would have happened if we had capitulated then?
Earnings estimates have been coming down hard, and growth looks to slow sharply. Economic growth is clearly slowing down for the first time in years. In the past that has mattered. We either have to decide that this time is different, or we should stick with our lens. We are sticking with our lens.
I also have to wonder, doesn't anybody else remember that the Fed was supposed to save us in 2000 and 2008 as well? I remember TheStreet.com joking in 2001 that people seemed to think that by cutting rates, the Fed was effectively buying Cisco (CSCO) routers. I'd argue the Fed did kind of save the market by guaranteeing commercial paper in 2008, if nothing else, but there was a lot of pain between the top and the bottom.
There are a lot of people who seem to be investing by just going with the wind right now. I strongly recommend you not be one of them. There’s probably a storm coming the other way shortly.
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