“The combination of central bankers’ unprecedented largesse (and liquidity) when combined with mindless quant strategies and the enormous popularity of ETFs will, as night follows day, become a toxic cocktail for the equity markets.”
At its daily low, the Nasdaq Index was down by more than -180 points.
Nevertheless, the bullish parade of talking heads in the business media have made scant references to the carnage (see Nvidia ( NVDA) , AMD ( AMD) , Amazon ( AMZN) , and others) that is taking place in a portion of the market. (A portion of the momentum-based market that many of them have favored!)
Today is an example of what I have been warning about — that there is an increasingly likely potential for machines and algos (that took us higher over the last few years) to take us down as well. What concerns me the most is that valuations are in the 95% decile of historic levels — making the downside so much greater than the upside.
So, what is the lesson?
Always evaluate your holdings and exposure — not on what you watch on Fox, CNBC or Bloomberg (or for that matter what you read in my Diary) — but, rather based on an assessment of reward vs risk (on stocks, sector and markets), a clear understanding of your risk appetite (and profile) and in consideration of your timeframes.
Talking heads are just that, full of a lot of breathless commentary — most usually reflected in a bullish narrative. More often than not they are trying to sell you something (a product or service). Unfortunately, with some exceptions, they are miles wide but only inches deep in their knowledge.
Moreover, should the market continue in a southerly route, I will guarantee you that few will admit to investment boners. These “carpet sweepers” will have told you that they saw this coming — reminding me of a Buffettism that “the rear view mirror is far clearer than the windshield.”
I would expressly take note of Rudi Dornbush’s words of wisdom that I cited earlier:
“The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought.”
Today I reduced my over the skis net short exposure back to about medium sized based on the recognition that the bull market will not die easily — and will certainly not drop in a straight line.
I remain opportunistic in my trading view and actions but ursine in my overall intermediate-term view.