The future!
;-)
First of all: We have a very strong Quad 1-2 right now, risk is on. I am long about 85% long (system book sold some stuff into strength) and I am not hedged.
· Tons of industries in the Quad 1-2 (risk on) bucket are bullish trend
· The right (cycs, not the dollar, not oil!) Quad 3 stuff flashes bullish trends
· The dollar and oil (both liquidity drainers) are bearish trend, which is bullish
· Quad 4 stuff (besides long-term bonds TLT) nowhere to be seen!
· Participation, e.g. breadth is huge (small-caps, mid-caps)
· Only negative: Positioning is neutral to overbought, while the sentiment I see is still cautious (so a mixed bag!).
For newer subscribers here is a video about the Quads:
My take: not the time to press hard on new positions but the time to let the winners run!
Network Momentum (Micro Quads / Tape, whatever you want to call it) —> 100- meter data —> Traders live here!
Longer term:
I get a ton of requests on going out to longer time frames, so what about 2024 and beyond?
Do I use longer term data / views? Yes, I do, it helps me to get conviction if (only if !!!!!!!!!!!!!!!!!!!!!!!) I see a risk on Quad 1-2.
Gun to my head:
Hard market —> easy market
We had a hard market for almost 3 Years. Since February / March 2021 we have a tough market for growth!
The rule is: tough markets follow easy markets and easy markets follow tough markets. So, it is very likely we are going to see easier markets in the next years.
Liquidity
Liquidity is rising, which is a tailwind for risk assets —>
Inflation
Inflation is falling, which is also great for risk assets: 80% of the movement of P/Es ratios is based on inflation, this correlation is much higher than P/Es to interest rates!
Sentiment / Positioning
Positioning is neutral to overbought right now, so in the short term that is a negative. BUT the media is not bullish here and Fintwit traders are very cautious having one foot out of the market all the time, selling winners. Do you see the “hold through drawdowns at all costs (HODL)” posts on X (Twitter) you saw 2021 / 2022? Also, I see many traders posting shorts on the QQQs or IWM trying to nail the top (this goes on since at least 4 weeks!) before the tape has changed to bearish (Quad 3-4) trying to squeeze out 2 - 5% anticipating the next pullback.
Breath thrusts
We had two breadth thrusts: at the beginning of 2023 and from November 2023 on which led to a lockout rally. A lockout rally combined with a breadth thrust is not bearish, it is bullish mid-term. Every bull market starts like this!
Small cap valuations
Valuations in the small cap space are very, very low. Comparable to 1999. From 2000 - 2007 small caps had a monster run. So that is likely the place to be in the next years.
Liquidity + Breadth Thrusts + Factor valuation (relative to its history) + Positioning and Sentiment (only needs to be neutral!) + Inflation —> 10.000-meter data: Investors with a tactical tilt live here!
#secularbullmarketUSA
It cracks me up how most US Citizens (especially the legal ones ;-)) really do not see the forest because all of the trees.
In my view the US is a developing country with all the advantages of a developed country.
Lots of space left ;-) —>
It is soooooo cool to be bearish on the US for US Citizens (and snobby Europeans) and frankly I think the reasons for that are behavioral (and sometimes political): Bears sound cool, bulls soundstupid. Bears sell subscriptions, bulls do sell (much) less subscriptions. It is as simple as that.
Digg deeper here:
#secularbullmarketUSA —> 100.000-meter Data: Investors. Buffett style investors live here, they do not care about 50% drawdowns, do not try this with high beta / CANSLIM / growth (ARKK names or crypto) strategies, you need growth at reasonable price and a ton of quality to do this, otherwise you will have 90% drawdowns and need 10 years to come back, Quality comes back fast (1-3 years) and mimics the ca. 50% drawdowns of the market, same (1-2 years) for small cap value momentum total return investors.
The following model is free (for members of portfolio123.com):
Why do I combine 100-meter data with 10.000-meter and 100.000-meter Data?
100.000-meter data: which country to invest / trade (USA, USA, USA ;-)) with conviction!
10.000-meter data: conviction too!
100-meter data: tactical portfolio expression (hedged, unhedged!)
Summary:
I need the longer-term view to be bullish when I see a bullish tape. So, for me it is good to know (assume, I might be wrong, if I am wrong the Quads will save me!) that mid-term (1-2 years) we have a tailwind.
That leads to the behavior, that I will take every risk on Quad 1-2 very, very serious and will be able to put on the trade (no matter how I feel!) and ride bull market volatility.
Why conviction?
Bull markets are not easy, because 10% pullbacks in my small cap value momentum with an earnings tilt strategy book (and every other strategy that prints performance!) are normal in bull markets.
Trading is pain arbitrage, no Coca Cola without a bit of vola!
The risk off Quad 3 - 4 hedges (or being in cash within a CANSLIM strategy) are there for mitigating the drawdowns.
But the money to be made is on the long side!
I wish you and your loved ones a super great 2024!
All the best and best regards.
Andreas
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You mentioned 80% of the movement in P/E ratios is due to inflation. What do you mean by that? When inflation goes down p/e moves up?
Sorry, this might be a dumb question but what is a lockout rally?
Thanks for the post and a reminder on the long term secular trend in the US!
Hello, Andreas.
Just a question;
From where do you get the information about in what Quad are we?