I've been arguing for the past few months that this market we are in is due for a correction. I've been called, in my comments and private messages, everything from a permanent bear to conspiracy theorist - I assure you, I'm neither. I've cited signs like the Fed, QE, the social media bubble, wild Nikkei trading, building tensions in Syria - and now, the beginning retreat of U.S. consumer sentiment to support my thesis.
As I always do, in the interest of disclosure, I'll admit up front that I've penned a fair amount of articles on the bull run ending since March of this year.
On March 12, with the market sitting right around 14,500, I argued that for all intents and purposes, we were at the end of the bull market. Let the record show that I'm not necessarily wrong - as the market rose a bit afterwards, but has since dropped back down into the mid 14,000's.
On April 16, I made the argument that the market is on the verge of panic. I still believe this to be true - the volatility and uncertainty during this latest three months has been bubbling under the surface so much so that it's palpable. Tacking the recent news on Syria to this, I'm more confident in this theory now than ever.
On July 25th, I contested that there has never been a better time to take your profitable positions from unrealized to realized than right now, a sentiment that looked to be dead on, as the market has pulled back since then.
On August 7th, I noticed that we had a couple things coming down the pipe that I thought could work together as catalysts to slow down, then reverse, the direction that the market was heading. I argued that the Fed tapering and a social media bubble could work together to bring the market down. The market has been down over 5% since then.
Today, I'm adding to my bearish sentiment, spurred by another clue in the first piece of news I picked up this morning regarding consumer sentiment pulling back from its highs.
The consumer sentiment index is basically a statistical measure of the general heath of the economy - making it a great tool for foreshadowing how the market can and will perform in the future. It compiles basic sentiments about how people feel regarding their financial health, the state of the economy, and future outlook. It's a stat that has been used since the mid 1900's and is closely tied to the market's current and future performance.
It was reported this morning, by CNBC:
U.S. consumer sentiment retreated in August from last month's six-year high, though Americans were slightly more upbeat in their outlook than earlier in the month, a survey released on Friday showed.
The Thomson Reuters/University of Michigan's final reading on the overall index on consumer sentiment slipped to 82.1 in August from 85.1 in July.
The final result did manage to top an initial mid-month reading of 80.0 and beat economists' expectations for a final read of 80.5.
"Most of the late August gain was due to more favorable income expectations, with consumers expecting the largest income gains in nearly five years, although the median expected increase was just 0.9 percent, less than the expected rate of inflation," survey director Richard Curtin said in a statement.
However, households with incomes below $75,000 grew more pessimistic about the future, and all households expected higher interest rates over the next year and slightly slower growth.
That helped drive the gauge of consumer expectations down to 73.7 from 76.5. The survey's barometer of current economic conditions slipped to 95.2 from 98.6 in July.
Ladies and gentlemen, the writing is on the wall, in this investor's opinion. How many signs are people going to need to see the trend reversal happening to the markets as a whole? We are at the beginning of market correction, climbing interest rates, less Fed intervention, and bearish season. This consumer sentiment, again, makes now four, rock solid strong arguments for a coming bear market:
- Consumer sentiment lagging
- The Federal Reserve tapering its bond buying
- A major social media bubble
- Tensions in Syria (and the state of overseas economies, in general)
My arguments for a bubble burst coming the Fed tapering its bond buying program were stated in my last article, "Syria, The Fed, and VXX: A Short Term Strategy", when I stated:
Despite comments made by perpetual talking head Jim Cramer last month, I contend that there is a direct correlation between how often and when the Fed injects money into the economy and the state of the global markets. The Federal Reserve has been the ultimate kind of insurance for people looking to go long in the market - essentially an entity that can prevent the market from heading to a recession whenever it wants.
No wonder everyone has been throwing as much money as they possibly can into stocks these last 3 years; we're betting with the house, and so far in the Keynesian era, the house always seems to win. It almost seems like the perfect crime, and it reminds me of every time as a child when my mother said to me "If something seems too good to be true, it probably is."
In addition, it was being reported earlier this week that American forces are on the ready to strike Syria if they're ordered by the president - so it looks like we're about to get ourselves into a potential situation overseas - something that, when compounded with other events, is likely not to bode well for the market. It was reported earlier this week:
The U.S. military stands ready to strike Syria at once if President Barack Obama gives the order, Defence Secretary Chuck Hagel said Tuesday as the United States prepared to formally declare that chemical weapons had been used in Syria's civil war.
U.S. officials said the growing intelligence pointed strongly toward Bashar Assad's government as the culprit in the chemical attack in the Damascus suburbs last week that activists say killed hundreds of people -- a claim Assad called "preposterous."
The U.S., along with allies in Europe, appeared to be laying the groundwork for the most aggressive response since the civil war began more than two years ago.
As I've previously said, I'm not that worried about a bunch of Syrians throwing rocks at U.S. tanks while we go in and try and find some resolution, but it's my opinion that the volatility involved that's going to act as a catalyst to an already overblown market.
In an article published earlier this month, I also made the observation that a coming "Social Media Bubble" could spur a macro market correction as well. If they don't start the fire, social media companies could very well fuel it, trading at insanely speculative valuations, as I noted:
This leads me to another simple point. Regardless of what the catalyst is that pulls the market back, the fact that these companies are trading as such speculative prices makes them the first targets should something unexpected happen to drastically pull back the markets.
No sector has just blindly taken off with the furiousness that the social media sector has over the past couple of years. It has some stark similarities to the dot com boom in 2000; similarities that shouldn't be ignored. Names like LinkedIn (NYSE:LNKD), Yelp (NYSE:YELP) and Facebook (NASDAQ:FB) have been on a tear as of late, easily outperforming the market as a whole. Even smaller and less well known companies like Angie's List (NASDAQ:ANGI) and Groupon (NASDAQ:GRPN) have been outperforming the market significantly. We have gone crazy for our social media stocks, as this chart indicates:
12 Month Performance
There's inherent risk in taking your portfolio bearish, but not a lot in this investor's opinion. The hysteria of bear markets is very similar to the hysteria of bull markets, sometimes they rocket up or down without rhyme or reason. The Fed has been our safety airbags in the Keynesian driver seat thus far, so don't underestimate how much they will actually do to prevent the market from correcting.
However, I'm still bearish on the market as a whole, and here's how I would be positioned for a coming bear market and to profit from volatility.
Position Bearish Portfolio
- Small 5%-10% long position in staple stocks [American Capital Agency (NASDAQ:AGNC), NuStar Energy (NYSE:NS), ACCO Brands (NYSE:ACCO)]
- Medium sized position in actual gold or silver bullion
- Medium sized cash position in FDIC insured account or in person
- Small position in volatility ETFs (NYSEARCA:VXX) and ETNs to be traded in the very short term
- Small long positions in gold and silver trusts (GLD, SLV)
- Medium sized long positions in inflation-adjusted Treasuries (AAA rated)
Go Long Volatility
- Buy ETPs that track the VIX, like CVOL
- Buy VIX call options
- Buy call options for VXV
- Buy S&P VIX Mid-Term Futures VXZ
- Buy S&P 500 VIX ETF listed as VIXS
Disclosure: I am long VXX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.