Santa’s Merry Massacre

Friday, December 2nd, 2022

What Santa gives the New Year can take away

Recent strength is US and global equities is entirely consistent with normal seasonality, particularly the outperformance of the Eurozone. If normal seasonal patterns prevail, we would expect many of the recent trends to reverse in the New Year as follows: US equities will give up recent gains, Eurozone equities will underperform, US Technology will suffer further declines and the US dollar will strengthen once again. All of this would be consistent with normal seasonality, as is our new call that the bottom of the bear market will not come until Q3 2023 at the earliest.

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Bear Market Sector Strategy

Friday, November 4th, 2022

What to focus on and what to ignore

It easy to be overwhelmed by the speed and quantity of information in a bear market. Investors need a clear focus on what matters and what doesn’t. In any bear market, there are about 10 sector pairs (out of 45) which really drive the performance of a regional equity portfolio and the rest don’t matter very much. These pairs vary from one bear market to the next but are relatively easy to identify. There is also another set of pairs, which may be significant in market cap terms, whose relative performance cannot be easily integrated with the rest of the portfolio. US sectors which feature heavily in this list in this bear market include Financials, Healthcare and Industrials. In Europe, they are Materials, Utilities and Financials.

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Timing the Turn

Monday, October 17th, 2022

Think like a hedge fund with a short-equity position

At the bottom of every bear market, there is a moment when equities turn, but most long-only managers are too risk-averse to believe it. Our approach does not try to anticipate this, but there are techniques we can use to spot the opportunity sooner. The trick is to think like a hedge fund manager with a short position in equities. In every bear market since 2000, the window for a risk-efficient short position in equities has opened weeks or months after our long-only models have got to an underweight position. This window also closes well before our long-only model rebuilds its position in equities. At the bottom of the cycle, the marginal buyer is the person with a short position.

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How Earnings Recessions Behave

Friday, June 10th, 2022

Consensus estimates aren’t reliable in a bear market

Bear markets can make the most rational of investment approaches look pretty stupid. Any concept of fair value based on consensus estimates can be downright dangerous. The typical delay between the peak in the index and the peak in estimates is more than 30 weeks, so we should not expect the consensus to start cutting until late August.  The typical drawdown in 12-month forward estimates lasts between 115 and 170 weeks. So, the estimates you are using for 2022/23 may also be the numbers for 2025/26.

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Don’t Forget the Skew

Thursday, November 29th, 2018

Plan for falling equities with violent changes of direction

Although our models are consistently bearish about the outlook for equities, we agree that there are several large problems which have depressed performance, which would allow the market to bounce if they were “solved” – even temporarily. Rather than prepare for an outright bear market, we think investors should focus on the bull/bear skew and sell countries which tend not to perform in rising markets, even though they are heavily exposed when they fall. This list includes several large Anglo-Saxon markets such as the UK, Canada and Australia.

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No Yellow Flags

Thursday, October 26th, 2017

Sector dynamics of early bear markets

A large rise in excess volatility (equity volatility minus bond volatility) is a good indicator of the onset of a bear market in the US and elsewhere. It also works at the sector level for those sectors which peak early, before the dynamics of contagion take over. Every bear market is different, but there are similarities in the early phases. Apart from Telecom, which is a very small sector, there are no warning signs at the US sector level at the moment.

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International Bears

Wednesday, October 18th, 2017

Excess volatility as an indicator of trouble ahead

After last week’s note about excess volatility in the US, we look at the experience of other developed markets in 2000, 2007 and 2015. In a majority of occasions, material increases in excess volatility signaled the onset of a correction and/or the transformation to a full-scale bear market. There are no such signals at the current time, which we regard as comforting, though not conclusive, evidence in favour of our equity overweight.
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A Bolt from the Blue

Thursday, October 12th, 2017

How to spot the next bear market

Provided that that causes of the next bear market in US equities originate in the US, investors should have time to adjust their asset allocation before the correction turns into a full-scale bear market. The necessary rise in excess volatility (equities minus bonds) takes several months and cannot happen without someone noticing.

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