Real Wealth Concepts

Sentiment is So Negative It’s Bullish. Yet Rate Cycle is Bearish.

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Bill Ackman called the recent spike in rates. Today he announced he has closed his short position. An interesting example of short-term trading in action.

Of course, this tweet provides limited information so shouldn’t be mistaken as investing advice. (We don’t know anything about his time horizon, other positions, etc. Also, he could change his mind tomorrow.)

In contrast to Ackman’s views, extreme bearish sentiment suggests a potential equity market buy signal, according to Bank of America. Historically, the median 3mth return once sentiment hit these levels was 7.6%.

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While investor sentiment can be a great contrarian indicator, perhaps the most garish contrarian indicator is the Federal Reserve.

The chart below shows the 9% loss for the S&P 500 since the Fed backed away from forecasting a recession. My long-time readers already know this, but the only thing consistent coming out of the Fed is mistakes.

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All of the above is tactical in nature. Weeks and months.

The problem with using short-term market timing indicators is they can shift quickly and are contradictory.

For example, another indicator contradicting the Bank of America research, the table below shows how a peak in Fed Funds rate is often followed by a 3mth equity market decline. We’re probably close to peak Fed Funds rate right now. So what do you pay attention to? Ackman, sentiment or rates?

If you have a full time job (or life) you might not be able to watch the markets close enough to anticipate shifts and ruminate over conflicting information. Personally, I prefer to enter positions that I don’t have to watch every waking minute. Instead, I track the markets daily as a way to stay ahead of the changing tide. This strategy has worked well for me, despite missing some tactical opportunities along the way.

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Speaking of shifting tides, the inflation trend began mid-2021, peaked mid-2022 and has been on a decline since. However, inflation is still nowhere near the Fed’s target.

The inflation trend is at a fork in the road. The economy could roll over because consumers have absorbed all they can pushing inflation down further. Or structural issues and commodity shortages could push inflation back up. We’re seeing some indication that the disinflationary trend of the past few months is reversing.

This is something I’m watching carefully.

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