May 28
3-Min. Weekly Market Sentiment Wrap-Up — May 28th
A core tenet that’s guided my investing style came from a mentor who said: “as long as you’re excited about trading, you won’t make money trading”
The above feels maybe a bit of a downer but the idea rings true. Investing is about a clear strategy, a sensible plan that you carry out with discipline. When you’re excited you’re also reactive, emotional, trigger-happy, biased, etc.
As a buy-and-hold investor, I don’t really trade much anymore but still apply the same cold, objective, disciplined mindset to my observation of markets.
For the past two-three months, I’ve been sharing my bearish bias. There’s just too much narrative for retracement and not enough for moves up: inflation is a real thing, central banks raising rates is happening along with quantitative tightening, geopolitical tensions having a real impact on investors, business, international trade and supply chain, along with covid still plaguing China.
Slowly, it seems investors have taken rose-tinted glasses and accepted their fate. Most people have now turned bearish.
The contrarian investor will realise that and think: well, hold on a minute, if everyone’s now axed to the downside, shouldn’t I be taking the other side of that trade? The answer is a resounding ‘yes!’… but not just yet, or not fully yet.
You can start to see signs of recovery, a distant rising sun.
On the topic of inflation, while I’ve been a strong detractor of the unabated money-printing by most government which was bound to result in some kind of diminishing purchasing power (of which inflation is a symptom), it seems that it may be peaking. Inflation is calculated on a year-to-year basis, and so it means that while things can rise for a time, as you enter into the next year, the benchmark to calculate the relative increase in price is higher -and so the increase in inflation relatively lower. We might be at a point where inflation is showing its first signs of peaking. This doesn’t mean it’s reverted back but it’s a start; there’s hope.
On the back of that, central banks will have more wiggle room to pause the rate hikes and avoid too much pain for investors and pension funds, essentially fully exposed to financial markets.
I want to reiterate: we’re not there yet but those are dynamics that are starting to forms and hint you can gather from headlines and data published by larger funds.
Similarly on the other geopolitical tensions and supply chain issues, I think that the tail-risk (the unlikely event that might change the current status quo) is on the bullish side, not the bearish side — an unexpected resolution of the war, the death of a dictator, a rapid policy shift in how trade is handle, how covid rules are applied, a new winner in an unexpected region that can provide a compelling alternatives… things that we -by definition- can’t forecast or define but can move markets around.
Again, we’re not there and nothing has changed, yet. But it’s good to be aware of these.
This is all good and well but… how do we play this?
As mentioned earlier and in previous posts, I’m an investor/accumulator, not a trader. I’m essentially only a buyer on pullbacks instead of someone timing markets and trying catch absolute bottoms or tops.
With that in mind, I think the only thing one can do is maximise and gather whatever liquidity one has and gradually allocate to assets one is willing to hold for the next 4–5 years.
This might be casually be brushed aside with a “sure, sure, I’m a long-term investor”. But are you? Will you be ok to see your portfolio stagnate or even fall another 10–20–30% from your break-even point, over a year or two? The answer should be yes -and if anything should be a beautiful opportunity to keep on allocating. But are you still emotional, are you still excited by trading, or will you be able to abide by your strategy and plan?
If the answer to the above is yes, here’s my prediction:
I think we’re due another 10–20% down.
This isn’t great for me, I’ve already started buying risk assets. It’s not the worst either, I still have capital to allocate and so I’m eagerly waiting for an opportunity to buy discounted assets.
Unless there’s an unexpected change, the current narratives still hold true and, believe it or not, still need to be digested and priced in by investors. It’s also worth noting that bottoms probably won’t be ‘V’-shaped anymore, as the accommodative monetary regime seems to be out the door. In other words, expect bottoms to take more time to form and the way up to be more strenuous than in the past twelve years.
For crypto, that means BTC isn’t done retracing. We’re currently in the upper 20Ks (after an earlier visit in the mid 20Ks, during the LUNA/UST debacle). We’ll probably need to retest the lower 20Ks… if not even lower. That’s a 30%+ drop from the current price. Crazy right, considering we’re already down more than 55% from the all-time high?
For equities, I see another -maybe tamer- drop of 15–25% for the Nasdaq, just assuming less volatility and, on a fundamental basis, an easier rationalisation for investments (ie. not matter how much you see value in BTC, it remains demand-supply driven, whereas a profitable and well-capitalised business with an infrastructure and network of users has quantifiable valuation metrics).
Real-estate is another one of my preferred investment vehicle -although not a large chunk of my portfolio, maybe just 15–20%. It suffers as well, as rate rises, and is the opportunity to buy in and ‘hodl’ (excuse the crypto-native slang). VNQ and VNQI (Vanguard US and International Real Estate ETFs) offer a healthy 5–10% annual dividend, paid out monthly. A great way to diversify and get a regular and truly passive income in a liquid vehicle that benefits also from real estate price appreciation.
All this to say: if you have capital available, instead of despairing or thinking of how you could have invested your current portfolio better or what you should do, just calmly keep on allocating (with buy-orders placed on the way down). Patiently, while other excited participants make mistake, you keep you eyes on the prize and enjoy the volatility, ever an opportunity to lower your total entry price across many assets and so the break-even level of your entire portfolio.
Buy when there’s blood in the street, even if it’s your own.
Disclaimer: none of the information contained here constitutes an offer (or solicitation of an offer) to buy or sell any currency, product or financial instrument, to make any investment, or to participate in any particular trading strategy.
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