As of today I have a bearish slant on the market. I'm thinking this is long term and The Big One...I'll explain next time I post, but I think today showed what the perfect storm to end this bubble will be. I'm still awaiting confirmation tomorrow or next week and I'm pretty light on everything right now and ready to turn on a dime. My radar is on high alert for the end of the bull party right now....tomorrow shall tell.
This post was a big one for me because it's the first time during my ET tenure that I'm long term bearish.
Well, today did tell and it was a very loud confirmation. Prior to this week, I'd noticed a few changes in the market--most notably, my ATH earnings trades were not panning out when I used earnings based valuations. Not a strange thing in it's own right, but that did represent a shift from prior earnings seasons where the trades worked out well and regularly. But I didn't think too much of that in the backdrop of the January climb. My radar was high when the market continued upwards, and EPS started diverging from prior levels in spite of earnings that were less enthusiastically received. The take away from all this is that the market now perceives we are at the high end of earnings based valuations and they'll be coming down.
The correction came on 2/2, and I posted live in here where I picked up the pieces on 2/9. And volatility never went away thereafter. This is, at least initially, something scary to me. So, I've been very skeptical of bull signs. When we failed to break out of the SPX flag pattern between 3/9 and 3/19, I took that as further concern for the health of the bull market. Yesterday broke out of the flag pattern the other way and held the lows into close.
The Cambridge Analytica / FB / targeted ads news has been dribbling out all week, and a light went off for me yesterday. This is likely the catalyst that brings the common sense argument to why earnings based valuations shouldn't be this high. People knew the mortgage backed securities had problems in 2006 and the housing bubble continued on until mortgage companies started defaulting catalyzing the response. People knew in 1998 (actually "irrational exuberance" was late '96) that the tech bubble had no earnings behind it and no basis for the lofty valuations. And even in the mid 1920s people knew that the leverage was out of control. But it wasn't until something brought these things to a head that the market reacted and did so violently.
I'd would suggest that fake news / targeted adds / election interference all occupies the same sphere as mortgage/housing bubble, tech bubble, and suspicions of banks (and leverage) in the 1920s...you might call each a 'zeitgeist'. What I realized yesterday is that there's a fundamental risk that the targeted ads carry in the context of concerns over media credibility and election integrity. My take away from Cambridge Analytica is that the arrangement with Facebook (an apparent blatant breach of the privacy policy--at least as any common user would understand it) was ordinary. I suspect we'll see similar disclosures of these types of arrangements from other companies in the coming days. And also, this is the kind of thing that, when coupled with the zeitgeist of fake news and elections could lead to congressional action against certain data collection policies. This is going to lead to a series of questions in the minds of investors along the lines of (all rhetorical, but all relevant):
- Will congress pass laws limiting the data collection of internet users, or add teeth behind largely unenforceable privacy policies?
- Will these regulations decrease the inherent value of advertising and bring it back on par with TV?
- What does this mean for the bottom lines of companies like GOOG, TWTR, FB?
- Will KO / TGT / AMZN revenues suffer because of limits to targeted marketing?
- Will V / MC / SQ transaction volumes suffer because of these limits?
- Will JPM or GS throughput suffer either in handling transactions or ownership of the stocks?
- Will limits to data collection result in a large reduction in data storage needs? Will this filter through to chips and server real estate companies?
This is something that has potential to most sectors of the economy and is at the forefront of everyone's mind--which may well translate into political will. Given that just GOOG, AMZN, and FB account for 6% of the SPX, and each has an earnings valuation predicated on continued growth of targeted advertising, a small threat to it could have massive market implications. And, I'll note that something like BA didn't get hit so hard today, nor did industrials genearlly, nor did oil and gas and basic materials--sectors not really dependent on targeted advertising to consumers.
And never mind the potential for political scandal in the current environment--nor its ability to influence the paradigm I've described above. It feels like Mueller is due to drop another bombshell in the next week or so, and the flurry of activity around the blast site suggests this might be the big one.
So as of now, I'm collared up on my investing positions, and my trading account is solidly bearish. I note the SPX is resting on its MA200, with the previous low of 2531 perilously close, and the psychologically damaging 2500 not far beneath. It's tough to see how we could recover the January highs if we breach those levels if news regarding data collection practices and political uncertainty drops the same time.
And to lighten the mood for anyone who tried to go long today, here's a little schadenfreude--one of my trades from today:
