November 6th 2019

Yesterday has been a flat day on the market. Indexes are near all time highs, but being long term investors we want to take a look on a larger perspective, in the past and in future.

We are recently experiencing a renewed BTD “buy the dip” attitude: the market goes up, and when some are taking profits back and selling stocks, there are more investors buying on the pullback. This is something we did not see from 2017, last year of fully bull trend.

2018 has been a choppy period, with a significant correction in first quarter, and an even worse correction in Q4. It looked as we were at the end of this ten-years bull market, but Q1 of 2019 has recovered fully and showed signs of a still-alive bull market.

Triggers for corrections or recoveries have been different, but we think they are just the surface justifications for an underline trend:

• if traders want to sell, they do at the first bad news they hear,
• if they want to buy (as now), they buy as soon as they see a ray of light in the sky.

In the long term it is not news or specific events (trade war, politics, drone attacks...) but the state and the perspective of the economy that leads the market.

In Q4-2018 the markets seemed to crash, but the state of the economy was not that bad after all, with a spectacular line of Earning Reports from companies during the year.

If it was a true economy crisis in that quarter, the V-shaped recovery of Q1-2019 would be inexplicable.

We could see both moves as usual and somehow “irrational” behaviors of markets, which eventually reverted to the mean. And the “mean” is the long-term trend of growth, originated by innovation and technology.

Let’s see markets with a wider look 1987-2019 (log scale). The trend line is clear, and it continues since 1900 or before: as far as there are new products, new services offered to consumers, new wealth is generated, then the market value (stock prices) will rise. At which rate? At the same rate of the current growth of innovation.

That’s what why try to follow, the bull we try to ride with our Hari Seldon Trader model:

• we stay invested as the bull is running,
• we step aside when markets stop running (markets often run too much and too far, compared to the real growth of the economy) and face crahes like in 2001 and 2008.

In a very long term perspective, today we are not too far from the average growth trend (blue line).
But how is the economy going? is it still generating new technologies, products and services to ensure an extended rise of markets?

Well, there are mixed messages from macro data:

• some factors are very good (like financial conditions, labor market)
• some factors are neutral (like companies’ profits, positive but declining)
• some are bearish (like yield curves and threats of recession somewhere in the world)

This means that the market could stop the rise soon (if the economy finds no room for further growth) and something (pick one!) will trigger a bear market, or it could continue this positive trend for more time.
We were expecting a drop of the macro data in October 2019, which did not come. What if corporate profits will get even better, and unemployment rate stays under 3,8 – 4 % for more years, what could we ask more from US economy?

So, nobody can really tell you for sure where the markets are going. It’s a guess.

We have designed the HST model not to predict anything, but to react promptly to the market behavior (technical indicators) and to the situation of the US economy (fundamental indicators).

It showed to work very fine during last 48 years (1971-2019). See performance here.

Our guess and hope is that markets can show a final leg up (even if the economy stops and macro deteriorates, markets could diverge for a while), we can take advantage from it with our investing model, and prepare for the next bear market, where we will stay cash for most of the time.

Our risk ratio is quite favorable right now: at the first signs of crisis the model will push us out soon to safer places, with a manageable drawdown. Stay tuned!

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