Kass: Can You Handle the Truth About This Market?

I ordered the Code Red.

The market is in chaos and more unstable than many think, but most ignore it.

The average values ​​are clinging to a thread. The Fed’s charged put is about to expire.

In relation to their “fair market value,” stocks are more overvalued than ever in recent history.

In the meantime, market participants have been lured into buying speculative Gewgaws of low value (read: GameStop (GME), AMC Entertainment (AMC), Canaan Inc. (CAN), Marathon Digital (MARA), Plug Power (PLUG), etc.)

“You can’t handle the truth. Son, we live in a world with walls, and those walls must be guarded by men with guns. Who will do it You? You, Lieutenant Weinberg? I have a greater responsibility than … you can imagine. They cry for Santiago and curse the marines. You have that luxury. You have the luxury of not knowing what I know – that Santiago’s death, though tragic, likely saved lives; and my existence, although grotesque and incomprehensible to you, saves lives. “”

As always, these are solely my views based on my analysis and observation of the markets. The spread between current market prices and “fair market value” is greater than ever in recent history and the downside risk dwarfs the upward premium.

The church of what is happening now has lost its congregation

“Markets are strongest when they’re broad and weakest when they’re limited to a handful of blue-chip names.”

– Bob Farrell

The breadth has deteriorated noticeably, and many other technical indicators are signaling difficulties. Many talking heads in the business media, investment “communities” (such as redditt, WallStreetBets and Robinhooders) have sold dealers and investors a bill of materials by promoting speculative Gewgaws (read: SPACs – laden with unscrupulous fees and questionable acquisition strategies) and sanctioning the high Fees follow – and cryptocurrency games as collateral) because they were briefly surpassed dramatically.

When I was critical and short many of these stocks (some that have now lost 75% in value), I was ridiculed and criticized. A general refrain: “What, Dougie, these stocks are flying and you obviously don’t want to make any money!” Most swept these idiotic businesses under the rug, but the really scary thing is that they still think they’re right.

Hell, even CEOs like AMC’s Adam Aron have been fooled into sub-optimal capital allocation strategies! In my view, he should be fired from his job for lying down in front of a number of day traders (the daily volume of AMC stocks routinely trades near or above the float) and those who supported him should make their big mistake admit (they won’t). ).

With their demise, dealers and investors (and the entire business media community) concentrated on Microsoft and FAANG and brought these stocks to an inflated level with a “low margin of safety”. Even bona fide antitrust questions (from both Republicans and Democrats) and threats were completely dismissed at this point.

The outperformance of these great franchises poses a potential threat to their investors because should a broader market decline occur, they will become ATMs and could fall quickly, despite claims by many who hold them for a long time.

Remember that historically there has been a pattern in which first becomes last. In all likelihood, we will see this pattern re-develop, especially if interest rates are higher than current levels.

Powell Poops

The Federal Reserve and our undisciplined political leaders on both sides of the pew have spawned a potentially deadly and liquid cocktail that has raised stocks, fixed income, art, digital currency and real estate to levels that are unsustainable and fragile.

The Fed is now behind the curve, and its swift adjustment to tighter policies is likely to come, and that will hit markets hard at a time when no one is expecting a big decline.

The Fed’s charged put is about to expire.

Please re-read and take into account Bob Farrell’s 10 Investment Rules

The markets tend to revert to the mean over time.

Translation: trends that are overstretched one way or another return to their long-term average. Often times, even during a strong uptrend or strong downtrend, prices move (return) to a long-term moving average.

Excesses in one direction lead to an opposite excess in the other direction.

Translation: Markets that swing upwards will also swing downwards, like a pendulum. The further it swings to one side, the further it bounces back on the other side.

There are no new eras – excesses never last.

Translation: There will be a hot group of stocks every few years, but fashions of speculation don’t last forever. In fact, we have seen speculative bubbles involving various groups of stocks over the past 100 years. Cars, radio and electricity drove the roaring 20s. The nifty-fifty fueled the bull market in the early 1970s. Biotechs bubble every 10 years or so and there was the dot-com bubble in the late 90s. “It’s different this time” is perhaps the most dangerous phrase in investing. As Jesse Livermore says:

“One lesson I learned early on is that there is nothing new on Wall Street. It can’t be because speculation is as old as the mountains. What happens in the stock market today has happened before and will happen again happen.”

Markets rising or falling exponentially usually go further than you think, but they don’t correct by going sideways.

Translation: Even if a hot group will return to the mean in the end, a strong trend can take a long time. However, once this trend ends, the correction tends to become sharp.

The audience buys the most at the top and the least at the bottom.

Translation: The average individual investor is most bullish at market highs and most bearish at market lows. The American Association of Individual Investors poll is often cited as a barometer of investor sentiment. In theory, an overly bullish sentiment warns of a market high, while an overly bearish sentiment warns of a market low.

Fear and greed are stronger than long-term determination.

Translation: Don’t let emotions cloud your decisions or interfere with your long-term plan. Plan your trade and trade your plan. Prepare for different scenarios so that you are not caught off guard by strong negative price movements. Heavy declines and losses can increase the fear factor and lead to panicked decisions in the heat of the moment. Likewise, strong progress and oversized profits can lead to overconfidence and deviations from the long term plan. To paraphrase Rudyard Kipling, you will be a much better trader or investor if you can keep your head when they all lose. When the emotions run high, take a deep breath, take a step back, and analyze the situation from a greater distance.

Markets are strongest when they’re broad and weakest when they’re limited to a handful of blue-chip names.

Translation: Width is important. A narrow-width rally indicates limited participation and the chances of failure are above average. The market cannot recover further if only a few large caps (generals) lead the way. Small and mid caps (troops) also need to be on board to give the rally credibility. A rally that lifts all boats shows far-reaching strength and increases the chances of further wins.

Bear markets have three phases – sharp downtrend, reflexive recovery, and a protracted fundamental downtrend.

Translation: Bear markets often begin with a sharp and rapid decline. After that decline, there is an oversold rebound that traces part of that decline. The decline then continues, albeit at a slower and slower pace, as fundamentals deteriorate. The Dow Theory holds that bear markets are made up of three downward moves with reflexive rebounds in between.

If all the experts and forecasts are in agreement, something else will happen.

Translation: This rule fits Farrell’s Contrarian Streak. If all analysts have a buy rating for a stock, there is only one way (downgrade). Exaggerated bullish sentiment from newsletter writers and analysts should be seen as a warning sign. Investors should consider buying when stocks are unloved and the news is bad. Conversely, if everyone is talking about stocks and the news is good, investors should consider selling. Such a contrarian investment strategy usually rewards patient investors.

Bull markets are more fun than bear markets.

Translation: Wall Street and Main Street are much more in tune with bull markets than bear markets.

Where i am

On Wednesday I wrote:

“It’s important to note that while I believe the S&P 500 index is measurably overpriced, my exposure is still relatively low, both gross and net.

This reflects (1) my respect for relentless market strength, (2) trying to be reactionary rather than forward-looking, and (3) my belief that there is a possibility of blow-off at some point.

I think the most likely scenario right now is that we are in a relatively tight trading range with a profit-taking bias (call it -3% to -5%).

Bull markets die hard.

But given the ongoing market chaos, noticeable curtailment of leadership, and other technical conditions, I’m changing my most likely scenario of a 3% to 5% market decline to a 5% to 10% decline.

Bottom line

“The market view is always 20/20 when you look at it in the rear-view mirror.”

– Warren Buffett

As Bob Farrell teaches us, there are no new epochs or paradigms, and excesses never last.

Throughout history, markets have reflected the balance between risk and reward. But it seems that we are in this new world belief where there is no risk and the rewards are easy to get.

I am not short enough.

Red alert.

(This comment originally appeared on Real Money Pro on July 15th. Click here to learn more about this dynamic market intelligence service for active traders and to receive Doug Kass’s daily diary and columns by Paul Price, Bret Jensen, and others.)

source https://thedailytradingnews.com/kass-can-you-handle-the-truth-about-this-market/