martes, 18 de junio de 2019

martes, junio 18, 2019

Spring Crash Of 2019: Risk Is Very, Very Real

by: Michael A. Gayed, CFA
Summary
 
- Lumber strength and weakness historically has preceded risk on/off environments.

- Lumber has little to do with China because it is primarily driven by US housing and construction demand.

- It is clear that something deeper than just trade war concerns is happening beneath the market’s surface.
 
"The ground beneath you is shifting, and either you get sucked in by holding on to old ways, or you take a giant step forward by taking some risks and seeing what happens."  
- Bonnie Hammer

There are certainties, there are probabilities, and there are possibilities. The role of every investor is to make decisions based on the very real possibility of a historically low probability event becoming a higher one and acting accordingly in case that possibility becomes a certainty when it's too late to do anything about it (now THAT is a brain teaser).
 
At the end of April, I appeared on Real Vision and made the case on a highly popular interview that a Spring Crash for stocks was possible given significant divergences into the advance of the "market" which everyone mistakenly believes is the S&P 500 (SPY) (click here to view S&P 500: Something is Ridiculously Wrong (w/ Michael Gayed) | Trade Ideas). It was not a scare tactic by any means. At the time, I explicitly pointed out the enormous disconnect between the direction of US equities and lumber.
 
Since then, seemingly everyone now has some research and observation about lumber prices as a leading indicator for stocks. The observation I made several weeks ago on lumber was not one based on opinion. In the Founder's Award winning paper "Lumber: Worth Its Weight In Gold" I co-authored, it is quantitatively proven that lumber strength and weakness historically has preceded risk on/off environments. Of course, there are plenty of false positives and negatives along the way, but when lumber is weak, risk is high for a crash in stocks after.
 
Lumber has little to do with China because it is primarily driven by US housing and construction demand. US housing and construction demand is important as drivers of not just the economy, but also consumer wealth. When we look at PMI activity and construction spending, it is clear that something deeper than just trade war concerns is happening beneath the market's surface - an argument I've been making in my recent Lead-Lag Reports here on Seeking Alpha.
 
 
My point is it's not just some "illiquid" and esoteric observation. It's 2019 - lumber matters more than Facebook (FB), Amazon (AMZN), Netflix (NFLX), etc. And if history is any guide, Lumber weakness historically suggests fundamentals and earnings are about to turn for the worse.
 
 
 
I'm going to keep repeating myself. The analysis I did on Real Vision has little to do with China (FXI). Don't think if you get a trade deal we are out of the woods (literally). Current probabilities do favor the very real possibility of a Spring Crash in stocks. In my opinion, it isn't worth the possibility of that becoming a certainty when it's too late to do anything about it.

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