Tilt is a poker term for a state of mental or emotional confusion or frustration in which a player adopts a suboptimal strategy, usually resulting in the player becoming overly aggressive.
The term originated from pinball where physically tilting the machine causes some games to flash the word "TILT" and freeze the flippers.
One can argue that today's stock market is on tilt, abetted by human emotion (these days of FOMO and greed), a lack of an historical perspective, and the proliferation and popularity of momentum-based products and strategies (quants and ETFs) that know everything about price but little about value (and exaggerate short term market swings).
Though inflation is likely to remain sticky and global economic, and U.S. corporate profit, conditions have steadily deteriorated since the beginning of 2023 -- equities, especially of a tech-kind, have steadily risen throughout the first four months of the year.
Along with higher stock prices, hedge fund net long exposure has managed to expand back to levels (93rd percentile) rarely seen in market history.
The advance in equities has been remarkably narrow -- and has not been seen since The Nifty Fifty period that ended (badly) 49 years ago.
This is the most lopsided and top heavy equity market since 1974.
On Monday in my Daily Diary on Real Money Pro I will have two extended discussions, taken from recent communications to Seabreeze Capital Partners LP investors, which outline my concerns in full.
For many short and longer term reasons -- I don't want to bury the lede! -- including the relationship between the S&P and Nasdaq indexes compared to interest rates, highlighted below, Seabreeze has moved into a net short exposure in equities:
* On Friday the Federal Funds Rate stood at 5.08%, the S&P 500 closed at 4136 and the consensus 2023 S&P EPS is projected at $224/share, which we view as too optimistic!
* On 2/24/22 the Federal Funds Rate was at only 0.08% at the time the S&P 500 closed at 4117 and when the forecasted 2023 S&P EPS was projected to be considerably higher at $244/share.
The S&P Index is about 1% above the top end of my expected trading range for 2023.
Thursday's rally from the lows was another day of Russell weakness and poor overall market breadth -- conditions that have existed most of the year:
As I have repeatedly mentioned, the S&P's entire advance is a function of a handful of large-cap technology stocks.
That said, it seems like a fine time to consider history and the perspective of two investing legends, Bob Farrell and my Putnam associate Wally Deemer:
Bob Farrell's 10 Lessons on Investing (and one from Wally Deemer)
Here are Bob Farrell's official 10 rules as related by Walt:
1. Markets tend to return to the mean over time.
2. Excesses in one direction will lead to an opposite excess in the other direction
3. There are no new eras -- excesses are never permanent.
4. Exponentially rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways.
5. The public buys the most at a top and the least at a bottom.
6. Fear and greed are stronger than long-term resolve.
7. Bull markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names.
8. Bear markets have three stages -- sharp down, reflexive rebound, and a drawn out fundamental downtrend.
9. When the experts and forecasts agree, something else is going to happen.
10. Bull markets are more fun than bear markets.
... and Wally Deemer offers a new rule to add to Bob's list:
11. Though business conditions may change, corporations and securities may change and financial institutions and regulations may change, human nature remains essentially the same.
Putting on a Long IWM/Short SPY Pairs Trade
US STOCKS: post yesterday's -0.8% drop, the Russell 2000 has dropped -12.8% since JAN
It has crashed -28.6% from it's Cycle Peak in NOV of 2021 pic.twitter.com/zHAyWRRaC2
- Keith McCullough (@KeithMcCullough) May 12, 2023
With the intent of capturing the differential between the advanced stage of market generals' shares (QQQ) and the weakness of the soldiers' shares (IWM) I am putting on a Long (IWM) ($174)/Short (SPY) ($414) pairs trade:
IWM is candlesticks vs. QQQ = Blue Line
(This commentary originally appeared on Doug Kass's Daily Diary on Real Money Pro on May 12. Click here to learn about this dynamic market information service for active traders and receive Doug Kass's Daily Diary and columns from Paul Price, Bret Jensen and others.)
