Has this been the least joyful bull market run in history? That's a fairly unquantifiable question, but Chaim Siegel of Elazar Advisors, LLC, argues that at the very least, the bull market isn't getting any credit. The author of Pro Trader and a long-time analyst, Siegel says too many people are missing out on the climb, which means there's still fuel in the tank. We asked him how he's riding the volatile news flow in 2017 and how it might have repercussions in the market, among other things.
Seeking Alpha: 2017 has so far been a tale of two years - on the one hand there is the year of breathless coverage, a changing US presidential administration, key elections in Europe and a changing rate environment. On the other hand, not much has seemed to actually happen, and we're still in a slow growth recovery. What's your take on the global economy?
Chaim Siegel of Elazar Advisors LLC, author of Pro Trader: The global economy appears to be picking up. We're focused on the US, which is seeing a pickup from Q1 to Q2, where GDP has gone from 1.2% to about 4% projected in Q2. It's something real. The extra confidence, whether fiscal stimulus happens or not, seems to have shoved businesses into finally doing more business, and it showed up in earnings and economic numbers.
What we're really amazed by is how many people are out of the market as it hits new highs. AAII, for instance, has below historical average bullishness. And as the market hit new highs, bullishness dropped, for instance, last week and bearishness picked up.
A lot of people are scared and getting out. That's not a sign of a top. Euphoria is a sign of a top.
We love the "action" in bonds. Even as the Fed says it is going to taper and reduce its $4 trillion bond portfolio, bonds don't budge. Investors are too afraid to let go of risk-free assets. That is not bearish as markets hit new highs. That is a sign of very bullish action with everybody still on the sidelines.
While things can change all the time, we want our Pro Traders to be aware of the short term but have the longer term imprinted in some part of the brain. We're trying to build a real-time, easy-to-follow, market-responsive map to understand risk but have our sights set on the bigger prize too.
SA: What time frame do you focus on in the market, and how do you stay focused on that given the incessant news flow in the online era? (Assuming you are very short term, how do you ride out the ups and downs?)
EA: Our time frame depends on what the market gives us. In oil it's shortened up, but in equity markets it's lengthening.
For oil (NYSEARCA:USO), we are getting fundamentally more bullish. The economy is picking up. OPEC is adamant about getting oil up. US inventories have now come down for multiple weeks in a row. That all said, you can't just buy oil. Oil's been dropping. So while we have the medium term in mind, we want to see it in the shorter-term action. We want to see oil actually stop going down before we want to buy.
For equity markets, we had been a little more shorter term, which we've adjusted, because what's going on now is the potential for a multi-year bull market. There's a big longer-term prize for markets, so we want to focus our Pro Traders on how to hold on, trading around positions to benefit from the dips and be positioned medium term for the bigger move higher. It's not cut and dried, but with a short-, medium- and longer-term gameplan, you can see it come to fruition.
As for the media noise you mentioned, one thing we notice is that whatever channel you turn to or whatever site you read, there are both bulls and bears. No network really takes a stand and says this is where we're headed. We think the media is shaking a lot of people out of the market, which is one key reason so many people are on the sidelines in disbelief. If we are in the early stages of a multi-year bull market, the mass media is doing their best to talk people out of it.
It gets confusing. Listening to all the noise is confusing. We have a couple of main obvious indicators that we keep our Pro Traders focused on so they don't get distracted from all the "noise." We mostly analyze earnings and jobs trends and overlay our trading models on that, which are more quant and technically based. So far they've been very strong. Earnings growth, in particular, has been the strongest in almost six years. That's good for stocks.
SA: What do you think is the biggest story for investors to watch in the second half of 2017 and beyond?
EA: Twofold: 1) nobody's in, and 2) the news media is going to keep people out as the market goes higher.
Please, whoever is reading, meditate on that one for a moment.
There is going to be a ton of volatility news-wise, which is a good thing if you are a trader, especially if you have conviction in the medium-term direction. That's a great setup for a trader.
The FBI investigation into President Trump and the debt ceiling are going to cause a lot of rips both up and down. They are not only going to be bad news, because news seems to come out bad one day and the very next day comes out good. So we are preparing our Pro Traders for the news and timing with the medium-term bullish focus in mind (for now).
SA: US stocks are at all-time highs and valuation levels not seen often historically. Are you bullish or bearish on US equities, and why?
EA: Valuations are high. But some valuations reported by the media are manipulated to look worse. The media focuses on the worst story possible to get viewers. It's exciting to report on worry and keep people out of the market.
For instance, the media has focused on Robert Shiller's version of P/E. Shiller has been a perma bear. Jeremy Siegel, who's been a perma bull, beat him up when they squared off recently, pointing out a few misses to Shiller's formula. No boxing gloves or anything, so it wasn't that much fun to watch, but it was meaningful to listen to.
For one, Shiller's "CAPE" averages 10 years of earnings, which includes the Great Recession. It underestimates earnings.
Shiller's chart also shows that valuations today are where they were at the end of the dot com boom, according to his math. It scares people. Siegel points out that the 10-year yield is 1/3rd of what it was back then. Anybody who does discounted cash flow valuations knows those earnings are worth more today because of those lower rates. Plus, the world is a better place earnings-wise. Companies are making money, not going public losing money in droves like they were then. It's a different environment.
We also think it makes sense to use forward earnings, which don't look as bad as Shiller's measures.
If rates remain low, which it looks like they are doing, valuations should be higher, especially as we're coming out of a very slow period of growth into a first-time faster period of growth. So, all the scare stories need the official grain-of-salt analysis. We try to help our Pro Traders sift through that.
Also, we never look at valuations as the catalyst, because valuations alone cannot be your catalyst. They always go further than you think. You need a fundamental catalyst to change course. By that we mean a slowdown, a shock... something. We don't have that right now. In fact, it's going the other way. Earnings are picking up. Either stocks work into the valuations or valuations go up. But without a change lower in earnings, valuations don't really mean that much to traders.
SA: How are you managing risk in the current environment?
EA: Great question and important. Into major events like James Comey or the Debt Ceiling, we'd ease up on long exposure if we don't see a ray of hope. When the news comes out and we see that there is no reaction, we can increase again. The key is work hard to be "in" but respecting the big news as it comes. If the market gets hit on those events, you'll know right away, and we think that's a buying opportunity given the medium-term backdrop.
Our bias is long, so managing risk is really also trying not to miss upside. Risk goes two ways. There is missing the upside and the downside.
So we think it's like an accordion. Into a major risk event as it approaches, like the debt ceiling, you can reduce, but if you get an inkling, especially on weakness, that it's going to be ok, you want to be back in or use the weakness to buy.
We think risk events are going to end well because of good "action," everybody out of the market and low rates.
SA: How do you manage your portfolio? Is it a mix of equities and ETFs, or do you go into other areas? How often do you rebalance or adjust your portfolio over time?
EA: We have our own quant models, technicals and fundamentals. We look at gold, oil, bonds, currencies, stocks and equity markets. We're tracking the news daily, sifting through the noise to make it make actionable sense to our Pro Traders based on our quant and technicals.
Every morning, first thing our Pro Traders have a complete rundown of what we sifted through for hours before it hit their inbox.
How do we adjust? We adjust daily, weekly and monthly, depending on what's going on.
SA: What's one of your favorite current ideas, and what is the story?
For now we love the market, but the biggest surprise can be oil to the upside. We think oil can catch a lot of people off guard by going higher. We do want to time it a little bit but, for instance, it's making everybody bearish and taking everybody to the sidelines. At the same time, inventories are coming down quickly, global growth is picking up and, oh by the way, OPEC has been sticking to the agreement at high rates coming on six months now.
Good luck to everybody. Thank you for the time, Seeking Alpha.
Thanks to Chaim for joining us this week. You can read Elazar Advisors, LLC's work for free by following their account, and you can check out Pro Trader here if you'd like to pursue the potential bull run with them.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.