Caveat Emptor – The Real World Has a Nasty Habit of Getting in the Way

I am not a big believer in correlation equals causation.  I am not even a big believe in chart correlations and this is coming from someone who spent a lot of time studying technical analysis and DeMarks.  Just because a chart says X or Y, does not mean it is going to happen.  If charts where 60% true, then there would be no other need for any type of investment analysis.  We would all sit around and just read charts about the future.  For this reason, I think we need to be careful at the temple of chart worship, but we should be very aware of the real world as it has a nasty habit of getting in the way and usually at the moment, we forget the meaning of hubris.

If you were big time long, like Robinhood long, into the market yesterday it was great day.  Up until about 3:10 in the afternoon.  After that, it sucked.  I am long some stocks, but I would be very careful with longs after watching yesterday’s late day reversal.  See the intraday charts I snapped from the WSJ.  I have read the Year 2000 analogies and some it makes sense.  What I do know about the month of August is weird things happen in August such as quant funds blowing up, mortgage markets collapsing and credit markets seizing.  August is weird as people are on vacation and I sometimes think that only a few really smart people who are working and the people left steering the ship do not see looming danger ahead.  A few observations:

– This Bloomberg article on the small businesses dying should not be happening with markets at these levels.  A quote from the article “Big companies are going bankrupt at a record pace, but that’s only part of the carnage. By some accounts, small businesses are disappearing by the thousands amid the Covid-19 pandemic, and the drag on the economy from these failures could be huge.”

– We are in an election year, just like 2000

– We have stocks splits like it is 2000, AAPL and TSLA

– We have all sorts of macro tensions

– We do not have a Y2K readiness crisis, but we do have a global pandemic

– We do not know how we are going to get kids back into schools or playing sports or learning arts.  We are just letting them sit at home, play Fortnite, watch Netflix and make TikTok videos.  I know that is an overstatement, but it is more true than false.

You what will drive the market down?  Margin calls and credit stress and that is why I think being a big buyer of equities up here might not be a good play, but it is very risky as best and the risk is skewed to the downside.  I think the prudent approach is buyer beware and keep a reserve of capital to play with.

As always, my thoughts on these matters might be completely wrong.