Thoughts on the Market Environment, July 2020

A succinct summary of key insights from recent subscription newsletters.

Thoughts on the market environment

My tactical asset allocation model, the Meta Strategy, signaled big changes in the stock market environment in recent weeks. This is a big deal, because the current regime of the market influences all my investing and trading decisions. Basic market assumptions change and new information is weighted differently in a fresh context.

For me personally we are back in the best investment environment: a „make money regime“ opposed to the previous „preserve capital” environment. Bullish estimates over the medium- to long-term now align with the basic upward trajectory of equity markets for high probability trade setups.

The FED Wins (for now)

The Meta Strategy signaled a regime switch to a new Bull Market environment on Friday, July 10th. This signifies a high probability for the bull case scenario that has been part of my Key Insights for several months now: “Enormous stimulus acts like rocket fuel to propel asset prices higher“. The answer to the key question (economic slowdown vs. fiscal stimulus – what will be stronger?) has just become more likely to be: the FED wins round #1.

Due to the regime change the bear case is losing a lot of its punch, because long-term forces have turned bullish. Intuitively this is hard to accept considering the economic environment, but the likelihood is high that the market is telling us something significant. Historically 85% of golden cross signals have led to higher stock prices over the medium- to long-term. (This of course leaves a 15% chance on the table that things turn bad again in a hurry – anything seems possible in 2020).

In my systematic strategy technical indicators based on market trend and volatility are used to signal the return to a Bull Market regime, because fundamentals often lag the stock price recovery coming out of a recession.

Read all about the Meta Strategy in my new, free eBook.

Fundamentals Recover

By now quite a few leading economic indicators also show a strong recovery which adds a significant tailwind to the current rally.

The majority of fundamental data surprises to the upside and sends the Citigroup Economic Surprise Index skyrocketing. To pick out some recent examples: Industrial Production rebounded more than 5% from a multi-year low and Small business sales outlook and optimism rebound strongly. Historically this has raised basic upside probabilities for the S&P 500 (which are already positive) by 10 to 15 percentage points, depending on the studied indicator.

The Citigroup Economic Surprises Index is at all-time-highs. Chart: Yardeni Research.

Tech Momentum and Sentiment are Exuberant

On the negative side a lot of froth is visible – the recent rally has been historic by any standard.

Major causes for concern are the parabolic tech momentum, concentrated in a handful of extremely strong companies, and very optimistic sentiment that often lead to violent pullbacks and choppy markets.
Options traders still keep setting new speculative records as they have done for several weeks already: low Put/Call ratio, high option speculation index and extreme call option volume all point to short-term headwinds.


Most of the recent advance is concentrated in a handful of tech stocks. The top 5 stocks in the S&P 500 make up more than 20% of the index for the first time in 40 years. Source: SentimenTrader via Twitter.

While speculative excess is high its quality changes with the new market environment. „Markets can stay irrational for longer than you can remain solvent (Keynes)“ is the new mantra and it will take considerable more evidence to go against exuberant sentiment. Going with the flow of the main market direction has become aligned with the speculative excesses of the crowd – an environment rich with opportunity and fraught with danger.

This leads to the big question: for how long to follow the wisdom (insanity) of the crowd and when to turn contrarian?

Strength begets strength. Exuberant momentum, e.g. S&P 500 quarters that are up over 20%, is often followed by even more gains over the next quarters.

While the signs are very positive over the next 3 to 12 months, volatile short-term corrections may happen at any time. As these are very hard to forecast the best opportunities probably arise after the market corrects and then re-aligns with the main uptrend.

A new, systematic regime change signal, whenever it happens, will mark the end of this market environment.

Recent Newsletter Recommendations

I introduced a new section on asymmetric trades with high upside and controlled risk that details my best ideas in the premium newsletter. I identify ways to participate in the current speculative environment while safeguarding against a sudden turn-around.

We are off to an excellent start with a recommendation for a leveraged bet on a potential parabolic move in Silver on July 13th – which is playing out in record time (and may mark the beginning of a longer bull market in precious metals):

These insights and trades are updated in detail (including a model portfolio) each Monday in my weekly report.
Preview a recent edition of the Meta Strategy Derivatives Portfolio newsletter here.

Thank you for reading and I wish you all the best.



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