March 11, 2023

Late last year I noted a sharp difference between the bank deposit yields that Schwab was providing of approximately 0.4% versus short term T-bills of 4% or more. Seeing this interest rate spread I moved the majority of client cash to T- bills at +4% or more rather than let it sit in a Schwab earning almost nothing.

As I’ve mentioned this was a simple choice to make which allowed us to earn interest while the Bear market in stocks and bonds evolved.

Banks and brokers have been negligent in raising money market interest rates to be competitive to short term T-bills because they earn quite a bit of revenue off the spread. They’re able to earn risk free rates in 3-month T-bills at 4% or more while the source of capital (your cash in money markets) earns under 0.5%.

Previously, outflows from bank interest rates were slow and since there was no urgency banks were slow to raise depositor interest rates.

This lack of urgency changed when the Fed’s interest rate hikes grew meaningfully and investors recognized the interest rate difference.

The chart below shows how higher paying money market.

As bank deposits decreased dramatically and moved into money markets in the past six months it forced banks to increase their liquidity by selling off other assets to raise capital to meet demand.

This is where the rubber meets the road. Exactly how was the bank investing the client deposits?

This is where SVB got into trouble. There is nothing like a 40-year trend in lower bond yields = higher bond price values to make bankers complacent. SVB invested a very large percentage of depositor assets into long term bonds. In other words the bank too substantial losses due to complacency and a lack of risk control. SVB did not hedge their Treasury bond risk.

If I were to use the $TLT ETF which holds Treasury bonds in the 20-30 year maturity range as a proxy: The TLT price peaked at $151 in December 2021. Yesterday it traded at $105.

SVB chose not to take the loss by selling and moved the bonds to a “Hold to Maturity” or HTM classification. If they took the loss it would have been reflected in their quarterly earnings reports.

Moving the bonds to HTM reduced the liquidity of the bank to meet day to day business. So, to replace the cash that was moved to the HTM category the bank offered to sell bonds, stocks and preferred to the investment community. Obviously, the offering was rejected and a run on the bank began.

Shares of SCHW were down 11% yesterday and I’m taking particular notice. At this time it does not appear they face the same risk as SVB. So far, SVB looks like an isolated event of risk of poor judgement and lack of risk management.

The decline in share price could come down to two distinct reasons: The long awaited merger with TD Waterhouse could be called off.

Second, the interest rate spread I mentioned earlier is a large source of revenue for Schwab. This is the age of no-commission trading so Schwab had to offset the loss of commission revenues in other ways. Paying next to nothing for deposits was large source of revenue.

Volatility

At present we have roughly 3% exposure to stocks. The balance is a combination of cash, Treasury bills and Municipal bonds. We have very little exposure to risk which allows us to be patient and let this storm blow itself out.

Many times I’ve said that when the Fed starts raising rates “things break”. SVB is case of a “Break” but I expect more to come. The breaks don’t have to come from banks, they can come from anywhere and they can be sudden.

Famous “breaks” are Enron, Worldcom and Madoff. All three emerged during Bear Markets.

For the past year and a half I’ve been very negative for stocks and was unable to embrace the rallies with any enthusiasm. Now, my tune is changing.

I will continue to be patient as there is no need to act right now. But my sense is that at some point (and there could be many points) in 2023 stocks will bottom and offer a great opportunity for those who’ve protected their assets this year.

My focus will be on the highest quality holdings. Major market bear markets are the best time to buy the highest quality stocks. Depressed prices offer a great opportunity to buy into franchises that rarely meaningfully sell off. These are the companies you can hold on to for the long term.

These companies are dominant in their category and frequently have a wide moat (dominant and difficult to compete against).

Examples are:

Monster Beverage
OTC Markets
Accenture
Adobe Systems
Autozone
Cintas
Google
Home Depot
Moody’s
Old Dominion Freight
Mastercard and Visa
Microsoft

We can afford to be patient and sit on our hands waiting for the right time to move. I suspect it will be this year. The time to be negative in the long term is over. Now is time to look for opportunity.

When the stock market rallies, the expected forward return for stocks declines.

When the stock market declines, the expected forward return for stocks rises.

Thank you for reading and being a client.
Brad Pappas

Waiting for the Fat Pitch
Feb 2023

For those not familiar: The Fat Pitch is a baseball reference for when a pitcher leaves a pitch flat and over the center of the plate. Meaning, that a pitch in the red zone offers the highest success percentage for a base hit. A disciplined batter will avoid low odds pitches and wait for a pitch right over the plate. No one put this concept more succinctly than Ted Willams.

For Ted Williams, the orange and especially the red zones were his ideal sweet spot. A spot he rarely missed which is depicted by the batting average inside each circle. In a career if you hit over .300 (a base hit in 30% of your at-bats you might well be in the Hall of Fame. He hit .344 during his career and he is arguably the greatest hitter of all time.

How does this apply to investing? I am waiting for the Fat Pitch aka the pitch in the red zone that has the highest probability of success. It’s expected there will be several tempting entry points for growth in 2023. My effort is to patient and wait for a pitch in the red zone.

For example in the Dot Com bust of 2000 to 2003 the top 5 Bear market rallies in the S&P 500 of 24%, 19%,12%,12% and 11%. But the peak to trough drawdown during the same period was -49%.

In the Great Financial Crisis of 2007 to 2009 the top 5 rallies were 21%, 21%, 21%, 19% and 15%. The peak to trough drawdown during the same period was -56%. 

Investors who chase these interim rallies are swinging at bad pitches with low success rates. Fear or FOMO (Fear of Missing Out) is an important driver for investors who think the markets can’t go lower and “This is the bottom”. 

We remain in a Bear Market

How will we know we are transitioning from Bear to Bull Market or in the example above to Fat Pitches?

• A series of aggressive interest rate cuts by the Federal Reserve. Lower rates allow stocks be more relatively attractive. Hiking rates makes them less attractive.

• An obvious recession: No more debates as when, if or how bad will the recession be. It will be obvious especially when the unemployment rate rises.

• The yield on 9 month Treasury Bill 4.9% and the dividend yield on the S&P 500 1.7%. At present the gap is potentially serious. A recession with falling stock prices would increase the dividend rate for stocks. Plus, the Federal Reserve would lower the Fed Funds rate which would narrow the gap.

• Finally, the downward slope of the 200-day moving average of the S&P 500 and the NASDAQ reverses to the upside. If there is a single factor that could signal the end of the negative trend in prices it would be a new upward slope of the 200-day moving averages. See the two charts below. Upward and downward slopes have a contrasting binary outcome.

Upward slope = +7.4% annualized rate of return
Downward slope = -1.6% annualized rate of return

Nasdaq Composite

Upward Slope = 13.1% annualized rate of return
Downward Slope = 0.79% annualized rate of return

To further define what it means to be buying stocks in a downtrend. Buying into a downtrend forces the investor to be a trader rather than a long term investor. Estimates have shown that over 70% of a stock’s behavior is due to underlying trend of the stock market as a whole. So by my way of thinking buying stocks in a downtrends is swinging at bad pitches.

If I’m completely wrong in my summary there is an exception. All transitions from Bear market to Bull market are confirmed by a trend change in the 200-day moving average. The 200-dma moves into an uptrend by default if stocks continue to show strength long enough.

Recent market strength

Markets view Fed Chair Powell as weak. In other words, they don’t see Powell as having the will to drive inflation into the ground with rate hikes. He’s not former Fed Chair Paul Volker who pushed rates to 20% in March 1980.

Volker at 6’7 with billowing cigar smoke in congressional hearings was the Capo Di Tutti Capi of Fed Chairs. Not to be intimidated by anyone especially Congress. The result of his rate hikes was the recession of 1981. However, his efforts put an end to the inflation of the 1970’s.

The probable cause of the most recent rally is the state of financial conditions which are signaling economic growth by easing financial conditions. 

is could mean a return of inflation and higher Fed Funds rate. Employment is not showing many signs of weakness which is problematic for the Fed. This could mean there is a future rug pull ahead (the Fed being forced to raise rates higher than expected and turn financial conditions back to the red). 

Source: The Conference Board

The Conference Board Leading Economic Indicators has moved into the recession zone.

Summary: Absolute Inflation has probably peaked but there can be more peaks in the cycle (from lower levels). Based on the Conference Board LEI we should be in a full bloom recession by mid 2023. 

If the recession is confirmed I could envision another steep decline of 20% to 30%. This would force the Fed to lower the Fed Funds rate and stimulate the economy. It might arguably be the best entry point for stocks in many years.

Any potential entry point until then offers relatively mediocre or poor risk/reward.

So we just wait for the eventual “Fat Pitch”.

Thank you for reading

Brad Pappas
February 6, 2023

It appears the biggest ever increase in 10 and 30 year Treasury yields / bond price declines ended on October 24.  In my opinion the rally in Treasury bonds has created on the best opportunity in years.   The timing is obviously tricky but prices should continue to rise as the economy weakens in 2023.

So with todays 50 basis point hike in the Fed Funds rate we have over 85% of all yield curves inverted.   This is a powerful indicator of problems ahead for both the economy and stocks.   

The Federal Reserve can only control short term interest rates, they have no control over long term rates or bond prices.   So, while the Fed in their wisdom is raising short term rates despite sharply declining inflation data.   (Inflation peaked 6 months ago in June at 9% annual rate.  But the annualized CPI rate since June has just been 2.4%.  The Producer Price Index since June is 1.1% annualized.

Meanwhile the Fed and speakers like Chairman Powell keep talking about raising rates and keeping them higher for longer.  It’s as if they don’t comprehend that inflation data has already rolled over.   If they follow their words with actions this could be a significant policy error, leading to a much deeper recession.

Or, a major policy reversal prompted by weaker incoming data that grabs their attention.   It’s really impossible to predict and certainly not the time to put assets at risk.

The long term bond market is defying the Fed and essentially saying: “We can see where this is going to end up later next year since you’re still raising interest rates with the economy rolling over.  So we’re going to lock in our interest rates on bonds because the Fed will be cutting rates in 2023.”  

The Treasury bond market is front-running the Federal Reserve.   Historically, the Fed has cut interest rates by 3 full percentage points or 300 basis points.   After todays hike the current Fed Funds rate is 4.5%.

If the Fed were force to cut rates by 300 basis points in 2023 and 2024 the rate could drop as low as to 1.5%.

* Our earliest purchase of the TLT (30 year bond ETF (exchange traded fund) was made with the yield at 3.92%.   Last weeks the yield on the 30 year Tbond was 3.41% a decline of 51 basis points.  Or, in price terms $100.08 versus todays (12/13/22) price of $107.6.  Our average price paid for the TLT is $101.96

• The paragraph above was written the week of December 12, 2022.  Since then Treasury bonds have fallen by about 5-6% as of December 20th.    While the potential for a good return still exists the retreat in bonds triggered one of my most important investment rules:

“Never allow an investment with a positive return become a loss.”  Or, in this case don’t let my conviction on T-bonds prevent my exerting risk control.

The TLT ETF whose cost was 101.96 was sold for 103.36.
The TLH was sold for 111.09 versus cost of approximately 110.6

The Treasury bond market is screaming that recession remains the mostly likely economic outcome for 2023.    If you’re trying to be a long term investor right now, understand that the Fed is not your friend.   They are deliberately trying to put the economy in recession and drop the stock market by another 20% to 30%.

Please keep the chart above in mind when you see that Fed chair Powell said today: “I don’t think anyone knows whether we’re gonna have a recession or not – and if we do, whether its going to be a deep one or not.  It’s just not knowable.”

Yield Curve Inversions are an accurate barometer for recessions and big stock market declines.

2023

The late Bill Meehan taught me that predicting the future is a mugs game. The odds of market’s recovering in 2023 is good.  Both due to the length in time of this Bear market, the eventual return to positive monetary policy which is prompted by lower inflation.

But, timing is everything. It’s not my intention to try pick the bottom of any market, thats for the foolish and clueless.

The chart below is courtesy of Ned Davis Research.   Inflation has truly rolled over as seen below.   I doubt any Fed Governor wants to be remembered for a huge recession by raising rates into falling inflation.   So its possible we may have seen the last of rate hikes regardless of what the Fed says today.

 This final chart is once again from Ned Davis and it displays a very simple yet effective timing tool to judge when it will be safe to return in size to stocks.

There is an immense disparity between stock returns when the 200-MA is trending higher versus trending lower; 13.1% versus -0.79%.  Fortunately, the time spent above the 200 day MA is 74.79% since 1973. 

Current Nasdaq versus the 200-day Moving Average Trend (Down)

The trend remains lower for stocks in the long term.   If I were to guess as to how 2023 goes:  I’d be looking for a final stock market bottom in the first 4-5 months of 23.  Followed by a period of stabilization with a formative rally in the 4th quarter lasting multiple years.

Recently the state of California sent out a questionnaire to all registered advisors regarding our exposure to FTX and its cohort bankrupt imploded buddies.   We had 0%.  But the entertainment value of watching the revelations is tremendous.

Thank you for reading

Brad Pappas

Does this rally have legs?

November 9th and 10th 2022

The last decade will be known as the Decade of the Big Tech Growth Stocks. A temporary period where investors deluded themselves into thinking the only stocks worth owning were shares in Technology: Amazon, Apple, Facebook, Microsoft, Google. These stocks represented approximately 23% of the S&P 500 Index.

This is not the first time its happened since human psychology tends to repeat itself. In the 1970’s there was the “Nifty Fifty” and you’re going to have to be of a certain age to remember these names. (Remember people thought they could buy these stocks and hold them forever. Many don’t exist anymore.)

Digital Equipment: financial problems forced a merger into Hewlett Packard.
Eastman Kodak: Bankruptcy
Emery Airfreight: Sold to Consolidated Freight after failed hostile takeover.
General Electric: 2011 forced into restructure after profitability collapsed.
Heublein: Sold to RJR Reynolds Tobacco which sold off Heublein’s assets.
JC Penny: May 2020 Chapter 11
Poloroid: 2008 Bankruptcy
Sears, Roebuck and Company: October 2018 Bankruptcy
Simplicity Pattern: 1998 sold to Conso International
S.S. Kresge: Renamed Kmart in 1977. By 2005 was part of Sears.
Upjohn: Acquired by Pfizer.

Just 22 years ago another generation of must-own stocks represented 18% of the S&P 500.

Microsoft
Cisco
Exxon
Mobil
General Electric
Intel

In this group only Microsoft and Exxon were able to maintain relevance. While Cisco remains a viable company the stock has yet to exceed its year 2000 high. 22 years is a very long time for dead money.

As for 2023 investors should expect no different.

The point I’m trying to make is that is common for investors to look at past favorites in the hope they’ll be future top performers. But it’s a very flawed strategy in real time. If you remember my letters from last year a high percentage of money was flowing primarily into Big Tech. Now the reverse is happening. The migration of capital out of Big Tech continues and that money is moving to the Russell 2000 Index composed of smaller company stocks which underperformed while Big Tech was dominating for the past decade.

If I were to guess I would say that we’re in the 7th inning of this Bear Market.

A short term Buy signal for stocks. (But not Big Tech)

MACD short term buy signal (Moving Average Convergence Divergence). Created by Gerald Appel in the 1970’s which shows changes in direction, momentum and strength of a stock or a market index. Longer term signals remain “out of the stock market”. But, short term signals are always the first to turn negative or positive.

New market leadership and a new trend will emerge as it always does. If a new Bull Market for stocks was to begin the stocks of smaller companies might be where it begins.

The chart below shows how the small stock Russell 2000 is outperforming the QQQ (proxy for Big Tech) when the line rises it indicates outperforming the QQQ. If investing was ever easy the leaders of the last bull run would repeat in the new one. Simple idea but its wrong.

Last month was extremely negative and investor sentiment was awful. This generally bodes will in the near term future results and at least a short term rally has occurred. I’m playing it very conservative with companies that are non- cyclical or not very sensitive to the economy.

We are only invested minimally in the strongest sectors and industries, primarily healthcare and insurance. Every stock we own has done well this year on an absolute and relative basis. I no desire to try to catch falling daggers aka tech stocks.

Update November 10, 2022

This mornings CPI inflation data came in below expectations as the year to year came in at 7.7% versus a forecast of 7.9%. The market exploded to the upside on this news with the Dow exceeding 800 points in less than a minute.

Fed chair Powell has said he’ll be watching the data closely as a signal for when they can minimize interest rate hikes. Markets are possibly pricing in an end to the hikes earlier than expected. If todays data is the start of a trend to lower inflation it would be a positive for both stocks and bonds. Longer term the Fed can move to a more accommodative policy in 2023.

Much of the biggest movers today to the upside are beaten down past leaders that are still in strong downtrends.

There is no need to chase stocks or bonds higher at present. If this rally has legs there will be ample opportunity to rebuild portfolios for a new Bull run.

Thank you for reading

Brad Pappas

September 6, 2022

Both stocks and bonds have declined since my last note to you from August 26. The Fed must correct the excesses created by the Fed during the Covid crisis. The official US response was $9.5 trillion of stimulus ($5tn fiscal and 4.5tn monetary stimulus). This amounted to 38% of GDP.

To put some perspective on how excessive the Fed was: During the financial crisis of 2008 the total fiscal stimulus was 5.7% of GDP (source St. Louis Fed) and monetary stimulus was 9% of GDP (Source Fed balance sheet). Added together there was a total of 14.7% of fiscal and monetary stimulus relative to GDP. And according to Brian Belkin there was no exit plan.

So, total Covid stimulus was 2.6 times larger than the 2008 credit crisis. I’m not even going to add stimulus data from the European ECB and other entities.

As the chart above shows given the excesses of past years its possible there is much more downside risk than investors are expecting. The 200-month moving average which is at 2250 could be reached. Thats another 40% down since at present the S&P 500 is at 3900.

Plus, Treasury bonds which have been very unforgiving have already pulled back and gone below their 200 month moving average.

So thats where we are, doing nothing and remaining patient. I still believe there is a moving coming in Treasury bonds but I have no idea where or when it will begin. My guess is that for bonds to move higher it will take another gruesome decline in stocks.

Thank you for reading
Brad Pappas

Driving Forward Thru The Rear Window
August 2022

The recent stock market rally over the last month garnered most of the attention from investors. The idea that just because the Treasury bond market has stabilized its now time to buy Growth Stocks is foolish. Buying due to lower rates works when the Fed has your back but its lethal when they’re not. This is typical of investors who don’t know any better and desperately need Fed stimulus to push stocks higher. The problem is the Fed is now doing the opposite with restrictive policies that are toxic to stocks but ideal for Treasury bonds (T-Bonds).

Earnings for these Growth stock giants are down 10.1% sequentially. Earnings are declining and thats what we would expect in a recession.

Nvidia could be added to the list. The semiconductor giant reporting Q2 revenue $6.7B versus estimate of $8.12B.

The Federal Reserve is fully focused lagging indicators like the Consumer Price Index and employment. The CPI is a reflection of past data and it takes 6-9 months for the rate hikes to have their effect on the economy. So the Fed can easily overshoot their objective of reducing the CPI. This also means they’ll place the country into recession (assuming we’re not in recession).

Since the data of the US going into recession is increasing prices for long term maturity Treasury bonds are rising. Even though the Fed will be raising short term rates, longer term rates are controlled by the open market. Yields are falling because present policies will cause a recession which will force the Fed to lower interest rates in 2023.

T-bond markets are forward thinking while the Fed is monitoring rear view data.

This is the most important chart I can show you. When the yield on the 10-year Treasury bond moves below the 2-year Treasury bond its called “Yield Curve Inversion” or YCI. YCI has a great history of being a forward indictor of rising unemployment, recessions and falling stock prices. The YCI has correctly anticipated every recession for the past 50 years.

When the Yield Curve inverts it’s a signal that interest rates will stop rising and T- bond prices will rise. This is why our highest asset allocation is to Treasury Bonds.

Recently RMHI became a client of Michael Belkin of the Belkin Report. Belkin created his proprietary forecasting model at UC Berkeley and further refined it as an analyst at Salomon Brothers. His institutional clients manage just under $2 trillion. From my perspective he is one of the best.

Based on his modeling:

1. Treasury bonds have exited their bear market which stocks have only just entered.

2. Recession “Our model forecast continues to point straight down for real GDP growth and corporate earnings, which are ultimately the determinants of stock prices. The forecast suggests the recession is just starting and will continue for 12-18 months. Sell stocks, buy government bonds.”
3. The current bear market in stocks is only about 1/3 finished. Nasdaq could fall 60% from the November 21 peak. The S&P 500 could fall 50%.
4. How best to position oneself for the near term future? Exactly what we are presently doing. A. Own Treasury bonds. Belkin expects the “TLT” Shares 20-30 year Treasury bond ETF to rise 15% to 20%.
5. When stock markets make temporary bounces higher add our 1x shorts (that benefit from falling stock prices) “SH” “RWM” and “PSQ”.
6. “Market psychology currently equates lower government bond yields with stock market optimism, especially for tech stocks….We disagree. Thats now how it works in a recession. Go back and look at 2000-2002 or late 2007 to early 2009. Tech stocks and the market got creamed while T-bonds rallied because the economy and S&P earnings collapsed. That is probably wha we’re setting up for again. Sell stocks and shift into government bonds.”

Belkin notes that there will be a shift in investor psychology away from stocks to T-bonds based on fear of a falling stock market. (This always happens in major bear markets. Investors give up hope in stocks and gravitate to the safety of T- bonds. As a result when the stock market eventually bottoms they’re too scared to return to stock and wait till the rally has already moved a great deal.)

As Stanley Druckenmiller has said: “Never, ever invest in the present……You have to visualize the situation 18 months from now, and whatever that is, that’s where the price will be, not where it is today.”

Thank you for reading
Brad Pappas
August 9, 2022

Todays Forecast is in the 70’s… the 1970’s

July 2, 2022

The standard recession investment playbook is to hide in Treasury bonds while stocks and the economy sink into recession. That has not worked as we’ve been stopped out twice on Treasury bonds this year. The most recent sale of bonds in client accounts occurred when I learned that the June CPI (Inflation) data was going to come in HOT, 8.3% to be exact. From what I’m hearing the July number could be in the range of 8.5% but that could be subject to change.

Inflation could be slowing due to Demand Destruction. As in, the cure for high prices is high prices. High prices alone will cause disinflation (not Deflation) and the consumer decides to hunker down and cut spending.

The chart below is from the Atlanta Federal Reserve and it reveals what I’ve been saying for quite a while…..Recession is in our midst. Ignore Fed chair Powell and any other politician who avoids telling the truth. Biden’s polling number are bad enough so he’s going to try to put a positive spin on the economy. Just imagine if he told the truth and said to be prepared for imminent recession? Powell on the other hand is an unelected official and he’s spinning the truth as well.

The Atlanta GDP Now data has gone below zero. This makes me think of The Who’s first hit single “I can’t explain”. I can’t explain how or why officials want to spin the truth. Then again, thats like screaming “fire” in a move theatre.

But here is the predicament the Fed faces: The Fed is raising interest rates into a weakening economy. Thats not the way it’s supposed to work. It’s like pushing over the Tower of Pisa.

The dilemma of the Fed remains a choice of two bad outcomes: If they continue to raise rates – the economy could go into a prolonged recession. If they fall short of raising rates enough high inflation will persist. Powell is on record that inflation is the higher priority.

The number of Fed hikes is not a static number. It’s been hovering between 7 or 8 hikes for months depending on the inflation data.

The current rate of inflation is not Biden’s fault any more that high gas prices. It’s a result of almost constant increase in money supply and stimulus since 2009.

As mentioned earlier, twice this year I’ve attempted to buy Treasuries but my timing was wrong. But now that Recession appears obvious. Many of the recession deniers

will look like idiots in a year but thats nothing new. On the bright side we may have seen a peak in interest rates. This implies that bond prices may be stabilizing.

It’s not just the incoming recession data that could cause stabilization of bond prices. The CPI might be peaking now as well.

The chart below shows the yields on an array of bond maturities. It appears that it’s possible, maybe, with some luck, there’s a chance, cross your fingers, hopefully, that the bear market in bonds may be ending. Focus on June in the chart, yields may be rolling over and prices could stabilize or rally.

Investment markets are always forward looking, typically 6-9 months in advance. It doesn’t matter if its stocks or bonds. The markets are potentially reflecting early 2023 now. This is why the stock market will likely bottom out in the middle of the recession.

China: The Chinese economy has been in a prolonged contraction for well over a year. And, as is typical their stock market has been decline for almost a year and a half. So, prices have fallen quite a bit. But now China is the only major industrial economy that is currently expanding its money supply to stimulate the economy.

Since the Chinese central bank has begun to inject capital and lower interest rates the Chinese stock market is emerging from Bear Market to early stage Bull Market. Sources of growth right now in the world are rare and China stands out.

To say that China is controversial might be an understatement. But I’ve never screened for countries only for industries or businesses that do not meet the RMHI screens. So if you don’t wish to own anything from China just let me know.

To be more accurate: Both Europe and the US are Shrinking their money supply.

Tuttle Capital Short Innovation ETF aka SARK

We have had almost a perfect record trading in SARK with the most recent profit taken on Thursday. In my process I don’t like to buy anything all at once. I always assume the price of a purchase may decline after the initial buy. Of course, it doesn’t always work that way. The recent decline in SARK which I used to buy in was very short lived. I just took the profit as it was presented wishing we had more shares.

I’m thinking that we may be at the end of trading SARK for the time being. SARK is now showing a pattern of lower high prices and lower low prices – a negative development. SARK is sensitive to interest rates. Its best days were when rates were rising but if rates do decline Cathie Woods long national nightmare could be over. The opposite of SARK is ARKK aka Ark Innovation ETF and that may be forming a tradable bottom.

Cathie Wood’s ARK Innovation ETF may be forming a bottom. At minimum it’s no longer making new lows but may need time to “base”. A base is a prolonged period of sideways movement within a trading range.

Summary: Stocks remain in a Bear Market with the Nasdaq composite index down 28.5% year to date. The S&P 500 is down 21.1%. While I would really love to have our client account go into the green for the year we will likely need the Treasury bond market to behave in order to do so. Since our YTD loss is minor, it’s possible with the CPI peaking that bonds may have made a bottom in price and a peak in yield. But more time will be needed to confirm this thesis.

Stocks remain by and large untouchable except for short term periods. Every prolonged bear markets in the US has had rallies that lasted for weeks into months before the market rollover over once again. But this hasn’t happened yet. I am on the lookout for this since stocks that were crushed this year are showing some signs of stabilization: See ARKK.

China has likely ended their prolonged bear market due to Central bank stimulus. Despite this, China is not a place to make big allocations of assets.

While I believe there is hope for progress in the intermediate time frame the overall economic background remains negative. We may be at or near the point when bad economic news becomes good for Treasury bonds. Time will tell.

Thank you,
Brad Pappas