I’m Going Bearish on the Market for the First Time Ever and Here’s Why

I had this thought the other day.

It went like this:

In my career following markets, one lesson has always been taught to me. That lesson is don’t be a hero, don’t try to call tops, and only take what the market gives you. Philosophically, that makes perfect sense. The market is entirely its own organism made up of different parts, people, connections and goals. Each day money moves one way and then another at millisecond speeds. You have to be feeling like Jordan in his prime if you think you can time something like this.

I guess that’s how I feel right now.

For the last few years I have held a neutral yet slightly bullish tone on the market. I mostly have been buying stocks on the long side. Since about mid-June, that’s changed. I officially have some short positions on and for reasons I will explain shortly. But first, enter my mind with a quick scene from Bull Durham:

Crash: Why are you shaking me off?
Nuke: I want to bring the heater. Announce my presence with authority.
Crash: To announce what?
Nuke: My presence with authority.
Crash: To announce your presence with authority?! This guy’s a first ball fastball hitter, looking for the heat.
Nuke: So what? He ain’t seen my heat.

My first fastball

I started to get bearish in June after the Fed said something about its balance sheet. For the first time since the Financial Crisis, they are going to become net sellers of their massive balance sheet. Just how big is it? About $4.5 trillion. The chart below shows how that looks (blue line) vs. the S&P 500 $SPY ETF (orange line) over the last 10 years:

Look at that chart closely one more time and then follow me to my next point, which I recently shared on StockTwits:

My second fastball

Creative destruction is great and I’m all for moving to solar and clean energy. But an entire generation of people grew their wealth and lives working or investing in companies like Exxon and Chevron. There is so much old money in these energy stocks and same is true overseas. In Russia, it’s the Lord Voldemort of energy Rosneft. In Latin America, it’s all about Petrobras, and in China they have Petro China Corp. The world is awash in oil and no one wants it anymore. An entire generation is being taught about clean energy and green house gases. Maybe that’s why oil is still getting hammered two years after its terrible sell-off:

Let us also not forget what happened just one year ago when energy sector spreads spiked to levels even higher than they were during the Financial Crisis. What’s going to happen to these spreads if crude oil drops again?:

My third fastball

Sure, Amazon is great and so are all these tech companies. Sure, none of us can’y stand malls and shopping centers. But retail supports 1 in 4 of all jobs in America. That’s a lot of employed people and it’s being entirely overlooked by most of us including the President who wants to impose a border adjustment tax on them. So when you see charts like this, you just can’t sleep on it:

Fastball number 4 in case I threw one ball

We’re now in a rising rate environment. The Fed has already raised rates two times in 2017 and you’re about to see what that’s done to telecom. I personally have not seen enough rising rate environments in my lifetime to truly understand them, but it seems straight up mind-boggling to go full YOLO rise dem rates brah I’ll still BTFD all day. I just can’t be apart of that right now:

Bring in the relief pitcher

Those are the four fastballs I’m throwing at the market. I’m willing to concede defeat when the market returns to all-time highs. I am looking for a 10% correction and a lot of sideways action. Yes, tech stocks remain ridiculously strong, but your old man with his positions in bluechips, telecom, and energy isn’t going to be too excited to put his money into that Google thing or the Tesla spaceship stuff. I don’t think it makes sense to be long here and I am happy to be trying to call my first top ever.