is getting harder and harder to find anything I want to own. Even my favorite stock, Microsoft (MSFT) which I have owned for 11 years has formed a bearish head and shoulder formation and trades at 12x book value.
I had half a thought of buying DJT for the presidential debate but even at the lows, it trades at 600 times sales and ten times book value. Maybe there’ll be a buy in the oil selloff.
Here is an interesting chart I found while I was running through stocks looking for value. It is another shocking signal of a top. This chart shows how much net worth households have put into equities.
It is at an all-time high.
A contrarian would ask themselves, “If everyone has bought, who is left to buy?” The answer, of course, is no one. There is no one left to buy.
You will notice that when this chart peaks it is followed by a major correction. It peaked in 1970, 1999, 2008, and 2020. It is peaking now.
Bottoms corresponded with great buying opportunities in the early 1980s, 2003, and late 2009.
Trading Volatility
Years ago I used to trade the volatility index (VIX). If you don’t know the VIX tries to measure movement in the S&P 500 using one-month-out futures contracts. There are 25 exchange-traded funds (EFTs) that use the VIX as the basis of their trading.
Until recently, the VIX has been dead in the water due to the fad of passive investing, coupled with machine trading and the wholesale firing of active managers which happened ten years ago. To put it simply, ETFs have replaced managed funds. ETFs don’t trade. Volume goes down. Volatility goes down.
So, the “short volatility” trade was the go-to 100% money-winning trade for the last several years – after the pandemic spike. Volatility goes down, you make money. Easy.
In order to satisfy this demand, special ETFs such as XIV and SVXY that use futures to short volatility sprang up to meet the need.
These ETFs aimed to provide daily inverse leverage on a VIX futures basket. So what happens when the VIX jumps 100% in a day, like it has done recently? ETFs like SVXY get crushed.
All of this is a long way of saying that the volatility trade works again. Stocks go up and down. All of these passive investors who have made a tremendous amount of money over the past ten years by buying the S&P 500 index will start to get nervous and pull their money out.
High-paying, white-collar workers – tech workers – are losing their jobs. Houses that went up 50% in value three years ago are not selling for those prices anymore and many people will have to eat the loss. There are millions of square feet of empty office space that have yet to be marketed to market.
Auto loan defaults are up. Ally Financial (ALLY), which used to be GMAC, was down 18% yesterday after the CEO said credit conditions have “intensified”. Savings are down, credit card usage is skyhigh, and the market is overvalued by as much as 33%.
Oil, copper, iron ore, and other commodities lumber are down showing a slowdown in manufacturing. Gold is about to breakout to the upside signaling a rush to quality. Utilities, a defensive sector, has returned better than tech this year.
Cash is a position and it is paying pretty well these days.
All the best,
Christian DeHaemer
Outsiderclub.com
Brit writes about Buffett selling: https://www.outsiderclub.com/why-is-buffett-selling-stock/
Sad banks: https://finance.yahoo.com/m/1d71c384-bd8d-3d35-9618-d54a3c1b4c1b/heard-on-the-street-tuesday.html
My take on the top: https://www.outsiderclub.com/the-wsj-just-rang-the-bell-at-the-top/
