Tuesday afternoon I had a conversation with a dear friend, someone I worked with for many years in the securities business. Over the years we have socialized and gotten to know each other's family. We keep count of grandchildren in an unofficial competition for bragging rights and other milestones. We share jokes, war stories, investment ideas and more.
This is the person I go to understand an initial public offering, the latest technology advancement that captivates Wall Street and to bounce ideas off. Tuesday we talked about the stock market, the direction of interest rates, the Fed, what individual investors were doing and buying calls versus writing calls. After saying goodbye I was nagged by the fact neither of us could come up with a compelling reason to be long the stock market -- an epiphany that resulted in a sleepless night.
Our reasoning jumped from topic to topic in no particular order; the dollar had peaked, the bond market was weak and the next stop for the 10-year was probably 2%, valuations were stretched, price targets were being cut, too many new investors had piled into the market in the past year, many IPOs were underwater, inflation was running hot. Plus, moving averages and support zones were being broken.
I penned a bearish outlook for 2022 on Dec. 9 and somewhere along the way, looking at individual stocks, I missed seeing some clues over the past few weeks. One clue that I should have paid more attention to was when a strong-looking stock failed to make an upside breakout and reversed to the downside; stocks such as Lennar ( LEN) and Nucor ( NUE) come to mind.
Weakness in the small-caps is another problem. In this daily line chart of the iShares Russell 2000 ETF IWM, below, we can see that prices have made a new low and broken below the lows of the past 10 months. Anyone who bought the ( IWM) in the past 10 months is under water. The On-Balance-Volume (OBV) line has been weak since July, and notice the bearish divergence in November when the IWM briefly made a new high but the OBV line diverged.
Weakness in tech names has been written about extensively on Real Money, so I don't need to highlight that here.
The movement of the NYSE Advance-Decline line is another issue that kept me awake. The A/D line historically has led stock prices by four to six months at major tops. The chart below shows that the A/D line has made no upward progress since June and is breaking the 40-week moving average line.
Bottom line strategy: In my 2022 forecast piece I wrote, "Has the bull market gone on so long that we really don't need to watch our investments? Has 2007-2008 been erased from our collective memories?"
It is now time to pay close attention.
My advice is to spend today going over all your investments. Cull out all your weak holdings that you believe will work long term if they are not working short term. Cull out holdings that are underwater instead of averaging down. Sell down to a sleeping position. Raise stops to lock in profits where possible.
