Mike Lipper’s Monday Morning Musings
Anticipating Tops
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018 –
Anticipating Tops
As an investor one can react to changes or anticipate them. Most investors tend to react because it is easier to do. The quick reactors tend to move in the direction recommended by their sources, without much in-depth analysis of the “new” information. As a result, market prices often reverse within days, making sentiment measures highly volatile. For example, the American Association of Individual Investors (AAII) polls a sample of its members each week for their market outlook for the next 6 months. In the latest survey only 30% were bullish compared to the prior week’s 43%. The bearish count moved even more, 39% compared to 23% the week before. As a contrarian and a student of history, I will take the bet. (Hopefully I am a better bookmaker than those that set the odds in Australia, U.K. and the U.S.)
With a background of investment analysis at the New York racetracks and a brother who served in Marine Recon in Korea, I attempt to anticipate both tops and bottoms of markets. I am not so bold or foolish as to try and come up with either the numerical top/bottom or the record date. At best I look to get a high profit with lower risk by anticipating the primary direction of the stock market. The remainder of this blog describes some of the elements used to recognize a market top and some attractive places to invest once prices are materially lower.
Top of the Market
Professional historians and particularly military historians believe the beginning of the hostilities in World War I were easily predictable, but not the timing of the movement of European armies. Their certainty was based on the linkage of the two great multi-national alliances and the lack of US participation. What was not known was the flash point. Many believe it was the assignation of the Archduke of Austria by an anarchist, except it took another six months before the battles began.
I am suggesting that we may well be witnessing the equivalent of building alliances, which in due time will lead to the top of the market. Chart analysis of the three Dow Jones averages (Industrials, Transportation, and Utilities) are showing topping formations. The reason to focus on the Dow Jones averages is that until recently they were rising at a slower rate than the NASDAQ Composite, which is dominated by Tech and service providers which had economically been growing faster. However, something has happened to change the sentiment towards the NASDAQ Composite stocks. For example, this past week 40% of the stocks on the NYSE rose vs. 32% on the NASDAQ. More significant is the new high and low lists where there were 319 new highs and 185 new lows on the NYSE, versus 214 new highs and 270 new lows on the NASDAQ.
There are other signs of extrapolation by so-called professional investors. Those signs are like Japanese investors selling yen to buy US dollar assets like golf courses and New York real estate before the “dot com” collapse. Some examples:
1. The most crowded trades listed in the Bank of America’s Fund Managers Survey were (in order):
- Long US Techs
- Short European stocks
- Long US dollar.
When a trade is crowded it suggests that those wanting in are paying a premium price to those who are selling. Historically the sellers are more often correct.
2. This week by far the biggest input to both Exchange Traded Funds and Conventional Mutual Funds were the flows into Money Market funds, especially into institutional funds. (Is this a withdrawal from the equity market and perhaps the high yield bond market?)
3. Two “name plate” firms are paying large amounts, e.g. $750 million in cash to purchase roll ups of registered investment advisors. (Do they need to do this because their investment records are not attracting enough new customers to meet their aspirations. Golf courses anyone?)
4. An increasing number of commentators have mentioned the large amount of money being invested by institutions in credit issues that lack the protective covenants of the past.
Looking for Future Winners
As a young junior analyst, I used to look at the list of stocks hitting new lows in order to find companies requiring further examination. A stock on this list, in the collective mind of the market, has a problem. Sometimes it is just sentiment or unpopularity, an actual problem that looks to be permanent, or both. Almost certainly it would have few friends in the investment community. This was hard work because many stocks hit the new low list, although it was occasionally worthwhile. Sometimes the problem was the result of a cyclical phenomenon or management in the process of addressing the problem. I eventually developed a solution to the problem of having too many companies to research and was helped by two realizations.
At this stage in my career I use mutual funds as the prime investment vehicle for my clients. Except for financial services companies, which are or could be part of the financial services fund that I manage, I have only a passing interest in individual companies. The exception to this rule are prominent companies in the funds we manage for clients. We will have to see whether “bottom fishing” for future ideas will be as successful using funds as it was employing individual stocks.
There are only six mutual fund investment objective averages showing minuses year-to-date through last Thursday. They are in reverse order:
Dedicated Short Bias -18.71%
Agricultural Commodities -6.31%
Equity Market Neutral -2.19%
India Regional -1.27%
Precious Metals funds -0.90%
Precious Metals Commodities -0.39%
Agricultural commodities and India Regional Funds, on a very long-term basis for multi-generational legacy accounts, one would think there are opportunities if the world is to make progress. The other investment objective declines are more the result of political reversals. There are 28 investment objectives, other than money-market and tax-exempt investment funds, that are gaining less than 5% year-to-date. Twenty-three are fixed income and five have an equity-risk component.
Question of the Week:
Do you have an organized way to find new investments?
Did you miss my past few blogs? Click one of the links below to read.
https://mikelipper.blogspot.com/2019/05/probable-view-of-next-decline-weekly.html
https://mikelipper.blogspot.com/2019/05/2nd-of-mays-good-lessons-weekly-blog-575.html
https://mikelipper.blogspot.com/2019/04/value-investing-will-be-superior-but-it.html
Did someone forward you this blog?
To receive Mike Lipper’s Blog each Monday morning, please subscribe by emailing me directly at AML@Lipperadvising.com
Copyright © 2008 - 2018
A. Michael Lipper, CFA
All rights reserved
Contact author for limited redistribution permission.
Looking for Future Winners
As a young junior analyst, I used to look at the list of stocks hitting new lows in order to find companies requiring further examination. A stock on this list, in the collective mind of the market, has a problem. Sometimes it is just sentiment or unpopularity, an actual problem that looks to be permanent, or both. Almost certainly it would have few friends in the investment community. This was hard work because many stocks hit the new low list, although it was occasionally worthwhile. Sometimes the problem was the result of a cyclical phenomenon or management in the process of addressing the problem. I eventually developed a solution to the problem of having too many companies to research and was helped by two realizations.
- There were far fewer names on the new list when the market was flat or rising.
- Markets recovering from a major break are not often led by the prior market winners, even though they are available at much lower prices.
At this stage in my career I use mutual funds as the prime investment vehicle for my clients. Except for financial services companies, which are or could be part of the financial services fund that I manage, I have only a passing interest in individual companies. The exception to this rule are prominent companies in the funds we manage for clients. We will have to see whether “bottom fishing” for future ideas will be as successful using funds as it was employing individual stocks.
There are only six mutual fund investment objective averages showing minuses year-to-date through last Thursday. They are in reverse order:
Dedicated Short Bias -18.71%
Agricultural Commodities -6.31%
Equity Market Neutral -2.19%
India Regional -1.27%
Precious Metals funds -0.90%
Precious Metals Commodities -0.39%
Agricultural commodities and India Regional Funds, on a very long-term basis for multi-generational legacy accounts, one would think there are opportunities if the world is to make progress. The other investment objective declines are more the result of political reversals. There are 28 investment objectives, other than money-market and tax-exempt investment funds, that are gaining less than 5% year-to-date. Twenty-three are fixed income and five have an equity-risk component.
Question of the Week:
Do you have an organized way to find new investments?
Did you miss my past few blogs? Click one of the links below to read.
https://mikelipper.blogspot.com/2019/05/probable-view-of-next-decline-weekly.html
https://mikelipper.blogspot.com/2019/05/2nd-of-mays-good-lessons-weekly-blog-575.html
https://mikelipper.blogspot.com/2019/04/value-investing-will-be-superior-but-it.html
Did someone forward you this blog?
To receive Mike Lipper’s Blog each Monday morning, please subscribe by emailing me directly at AML@Lipperadvising.com
Copyright © 2008 - 2018
A. Michael Lipper, CFA
All rights reserved
Contact author for limited redistribution permission.
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