MAGGIE LAKE: Hi, everyone. Welcome to the Real Vision Daily Briefing. It's Monday, April 25th, 2022. I'm Maggie Lake. And here with me today is Mark Ritchie, managing partner and chief investment officer of RTM Capital Investors. Hi, Mark. How are you?
MARK RITCHIEII: Good, Maggie. Thanks for having me back.
MAGGIE LAKE: Yeah. And it's a great time. I'm really interested to get your thoughts because we saw some pretty interesting market action today, including-- we got to start with it, the news that Elon Musk is successfully buying Twitter after all the back and forth around that $54.20 a share, $44 billion deal. He's going to be taking the company private.
Twitter has been blowing up with the news that he's buying Twitter, and I'm sure there's going to be a lot of opinions about that. But it almost overshadow the fact that we saw a broad rebound in equity markets after that really ugly close on Friday. We opened lower, but they came back. And they've actually been rallying into the close, which is interesting.
The Dow up about a 0.5%, no, actually 0.75%, S&P 500 0.5%, NASDAQ, the best performer, up 1.26%. We saw the yields on the 10Y Treasury back away from 3%, hovering around 2.82%. And the VIX edged down. But interestingly, that's sticking at an elevated level around 27. When you put it all together, what did you make of this trading session, especially that equity turnaround?
MARK RITCHIEII: Right. Today, it was interesting, and in some ways, it's just a microcosm really of the year and the type of market we're in. This is a classic bear market type action, in my view, where we don't have a strong bid under the market, which was really evident at the end of last week where the market got clobbered pretty good Thursday and Friday. And even on Friday, we didn't even have much volume, and it was just that classic 45-degree upper left to lower right in your screen where it just marched lower all day.
Today, we opened soft, which I would have expected that's pretty normal after a bad Friday close. And yeah, we found our footing. I'll be interested to see where the volume run rate came. But we're in no man's land here. We were short term oversold. Doesn't surprise me, though, that volatility didn't come off very much. Because I think there are a lot of people who probably aren't willing to part with their protection just yet based upon say the price action over the last two weeks.
MAGGIE LAKE: Yeah. And in fact, it was actually, even when the market was rallying back, the VIX was up for a long time, it finally turned negative at the end of the day, but I saw that and I was like, oh, that doesn't look like there's very much conviction in this equity bounce.
What are you looking at when you look underneath the hood? Does it seem like this has the potential to be a floor? Or does it seem like it's just really that bear market bounce, and it's very fragile? How is it feeling to you?
MARK RITCHIEII: The latter. I was reviewing my notes when we last talked in January. Keep in mind that was prior to an official war kicking off. And I was saying, we're in a cyclical bear market, per our work. The bad news, I guess, is nothing has changed. And potentially, under the surface, it has only gotten worse.
The good news would be that I think sentiment has gotten a little bit worse or a little bit more negative. The problem with some of the sentiment surveys and those types of things is they're contrarian, but they're not always the best timing mechanisms. Things can stay overbought for a long period of time, they can stay oversold.
There are a lot of the newsletter writers like AAII, I think, a week and a half ago came out with the lowest number of vols in a survey in 30 years. Well, that is a contrarian, a good indicator, but everything else doesn't look very good. Where would you like me to start? And we can go through that--
MAGGIE LAKE: You bring up a really good point, because I was speaking to Jared Dillian on Friday. And everybody's Spidey sense, I think is what he calls it, we were laughing, but it feels like things aren't good. And there's more damage to calm or things might be breaking underneath the surface somewhere. You just don't know where it is yet.
There's a lot of fear of that. But on a really short-term basis, and maybe this is where the time horizon for this stuff, we have to introduce that into the conversation, on a short-term basis, he felt like the bond move was exhausted. Because everybody said rates are going up. Everybody says mortgage rates are going up. And it just felt like when everyone's in consensus, it just feels overdone.
The super short term, he was looking at bonds, but then there's this medium to longer term, specially that medium term just looks like a hot mess. Talk to me a little bit about timeframe, and what you're looking at. And are you concentrating on equities? Or is this really all about bonds? Are bond yields driving everything here?
MARK RITCHIEII: A lot of questions there. And they're all really relevant. And listen, a number of people have made this point on Real Vision, and throughout the Twittersphere, that type of thing. When the market is grappling with too many things at one time, it's generally a headwind, meaning, the more managers have to discount to many possible issues, the more they are to lighten up in risk.
I will say this, even in the short run. I'm surprised the equities have traded as well as they have. And I say that based on a few things. One, the action under the hood intermediate term in terms of the stocks themselves, has been as bad as I've seen it since 2008, specifically in tech. I know you and I talked about this.
We've talked about this the last couple of times where I was saying even going all the way back to last summer, I was saying the frothiest parts of the market have topped. Well, that was like when Ark was off 30%. Now, it's off 65%, 70%. You're seeing some of these former leaders have just gotten absolutely crushed. This is classic secular bear market type action in some of these stocks under the hood.
Now whether that means the overall index turns into a secular bear market, that's almost irrelevant to me, because I'm saying there's enough headwinds where you should have raised cash a while ago, at least per my work. Because really, the only areas that have been holding up were these inflationary impulse areas, oil and commodity related.
Those took a hit today. And then of course, we saw that rotation trade reversed the other way, where tech has been beaten up the most, it led today. That feels more like an oversold bounce to me. The other point I would make though is we've had now multiple rally attempts.
And what I mean by that is based on the old William O'Neal follow through days, there's a simple rule that says when the market rallies, I'm talking about the general market, more than 1% for days off the low on an increase in volume, that has decent historical predictive ability, usually about 50/50. Most people might say, well, 50/50, that's not that great.
However, the ones that work are generally good for multiples of that risk on the upside. We've seen multiple attempts now fail. Most of those failures happen during cyclical and secular bear markets. The percentage of stocks that are trading above their long-term moving averages has continued to stay very low. Right now, I just ran this, 20% of NASDAQ stocks are above their 200-day moving average.
Well, it should be no coincidence then. Where did the NASDAQ fail? Right at the 200 a week and a half ago, and all the major indices failed to hold their 200-day moving average, rolled over and now, the weaker ones, the Russell and the NASDAQ, both of their 200-days have now started to roll over and are turning down. That's classic cyclical bear market type action.
The Fang is another good area. We've lost half of the Fang in terms of you look at the old growth at a reasonable price, those institutional favorites where some people even said things like these stocks can't go down. Well, we've got Netflix last week as just a classic example.
MAGGIE LAKE: Gosh, that's just ugly. That chart is terrible this month.
MARK RITCHIEII: Well, but if you look at what happened there, this is a-- I tweeted about this in January and February when Facebook and Netflix broke. And I said this is the largest price and volume declines since the beginning of the move.
What I mean by that is over the last 24 months, we haven't seen this aggressive of selling. That is a huge change in character that is like your check engine and oil light going off at the same time saying something is wrong. And how many people did you hear come out, Maggie, saying, oh, these stocks are a great bargain down here?
MAGGIE LAKE: Yeah, and that is a really, really important question. I want to ask one though, from Bo. I'd like to get as many questions in as I can, so everyone listening, feel free to drop them. And we'll try to get as many as possible. But Bo is asking, are we running out from the RV site? Are we running out of rotations yet?
I think it's a great question because people were chasing that momentum out of big tech into energy. But you saw a day like Friday, and this has been happening, to your point, where everything's getting killed, so what do you think about that?
MARK RITCHIEII: Well, there's an old saying that in bear markets, they eventually get to everything. And it's a really good question, because one of the things-- I've tweeted about this a little bit, but we've been talking about it in our shop that if the rotation trade just turns into a liquidation trade, we could go a lot lower quickly.
And I've made this point, I'll make this point until I'm dead and gone, and somebody else can make it that it's when markets lose lifts that they're most dangerous. That's why somebody like me, right now, I'm not saying we're going to go 10% lower in three days, or those type of slide type moves.
But every time that happens, it happens in an environment like we're sitting in where there has been distribution dominating the tape. We're trading below technical areas of support. And there's very little leadership. It's like, if I give you a couple of ingredients as your bartender and start throwing them in a shaker, and they all don't sound very good, putting the three together and shaking them up isn't going to make it taste any better.
That's precisely the cocktail we have right now. You just have to be a little bit more tactical, in my view, and understand the risks. I can get into too, I think there's a larger theme going on, in my view, of the market has been reinforcing certain risk management strategies that I think are being challenged and have been challenged over the last 12 to 18 months. And I don't know that that is over. We can get into that a little bit more if you want.
MAGGIE LAKE: Yeah, talk to me, what do you mean, what behaviors? I'm assuming is this buy the dip, is that we're talking about? 60/40 buy.
MARK RITCHIEII: You just nailed two of them. Let's start with buy the dip, or the idea that the market will just bail me out. Anybody who has been around long enough knows that bull markets and strong trends reward dip buyers until they don't. The old the trend is your friend until the large dip at the end.
And this is precisely, equities over the last decade, everybody has slowly adopted this idea of maybe it's the Fed that will bail me out or this continued TINA, there is no alternative, type of thing. And I'll get into a little bit why that may be changing, but let's just look in the past year. How many people decided, well just buy the dip in all the tech leaders that I mentioned prior?
Well, they've had their heads handed to them. How about long short equity guys who decided, well, we don't need to use stops when we short something like GameStop, or AMC? They've been carried out. The 60/40 guys, you mentioned, I just wrote about this in a piece for the Epic Times called Risk Non-parity, saying that when you decide to manage risk by laying it off onto something else rather than trimming, so if I'm holding risk in my left hand, and I decide instead of just dealing with the left hand, I'll find something I can hold on to and my right hand.
And these are supposed to go like this, and then they both go like that. You're going to have a big problem. And I've heard it my whole career. Well, I don't need to raise cash in equities because I have these bonds over here that are carrying them. We just had the worst quarter in the history of that strategy. And that strategy is designed to eat like a bird in terms of its returns.
Well, now it's taken a dump like an elephant. And everybody is asking themselves, is this the worst? Is it past? I'm not so sure. Look at strategies and funds like Archegos, same thing. These blow ups that we're seeing. And how many people have been conditioned then in the larger sense to say, well, the Fed has my back?
The last couple of times the Fed's been talking, Maggie, they're not saying that anymore. It doesn't mean they won't eventually.
MAGGIE LAKE: On the contrary, they seem to be indicating the exact opposite.
MARK RITCHIEII: Exactly right. And this is what, but maybe that's why the equities have traded a little better than I would have thought. I'm not sure, which is why I'm always going to default to both the technicals and fundamentals. But as I see it, the Fed is saying, heads, we're going to raise rates, tails, we're going to raise rates even more.
Either scenario, we're going to withdraw liquidity or withdraw even faster. Now, that is not generally speaking the most bullish fundamental driver either. Those are the two major things we're grappling with. And the way that's going to manifest itself is I think, precisely what I described earlier, people realizing, well, I thought this was a good risk management strategy, but maybe it wasn't. And could bonds and equities both continue to fall? Absolutely. Whoever said they both have to go up at the same time?
MAGGIE LAKE: And that's what made people so nervous, especially on Friday. And again, not to overemphasize the action on Friday, we have been seeing this on days, but it was ratcheting up into the close, and everything was getting taken down at the same time. And you did have that feeling where, wait, wait, this isn't supposed to happen.
I want to introduce the idea of where to look in this environment. Some great questions, but Michael Nicoletos spoke to Dan Rasmussen of Verdad Advisers, and he was talking about trying to navigate this tricky period and the attractiveness for him of gold. Let's have a listen to that clip.
DAN RASMUSSEN: Gold is a really interesting trade. I love gold and I used to think people that bought gold were crazy, okay. The gold bugs, why would you own gold? It's this metal that Warren Buffett thinks is just a big thing, a big block of metal. Why would you own it? Until I started doing a lot of macroeconomic analysis.
And then you see why people like gold and the reason people like gold is that the back half of the economic cycle, which is stagflation going into recession. And what happens again, stagflation can tip into recession really fast, or tip into slowdown really fast. What you're looking for in the back half of the economic cycle is something that's going to do well both in stagflation and in recession.
You look at something like Treasurys, we say, hey, you could take some pain in the inflation part of the stagflation before you get that flip over into recession. You own them knowing you'll take some short-term pain, because you'll take small losses and avoid big losses in your portfolio. It's a good thing to own Treasurys because you're getting ready for the next play.
Whereas gold can work in both. Gold works because people are worried about inflation, so they buy gold. And then when slowdown happens, people panic about everything, and they buy gold because they're scared. You'll get this beautiful performance of gold across the back half of the cycle, that makes, I think, a really interesting diversifying asset to a lot of your other exposures.
I think as a commodity play, if you're bullish on commodities, now, gold doesn't have the same upside volatility as oil. But I think it's a much safer portfolio play because of the way it works across both of those two economic environments.
MAGGIE LAKE: And that full interview is available to Essential Plus and Pro members on our website. Mark, what do you think about that? Are you looking at gold?
MARK RITCHIEII: Well, I would argue today's price action in gold was not very good. Because if you look, we had this breakout above the 1800, 1850 area, and I highlighted this as well a few months ago when it started to move. But this pullback and in my view is getting a little bit excessive, so I would defer the technicals.
And personally, I am not a gold bug. I've made this point before. I trade gold when it sets up and it's almost always a trade. And there are some fundamental things in gold I still don't fully understand. I've heard the gold bug argument my whole career. And likewise, the other people that say, well, gold doesn't yield anything and doesn't really do much and doesn't have any industrial uses.
I think both arguments are probably equally valid at equal times. I'm saying when you look at the larger chart, and actually, I talked about this with Jim Roble when I interviewed him last and we caught up and he was saying, hey, this is one of the most elegant chart patterns. Well, it doesn't look as elegant right now because I think it's pulled in a little much. And I would just say that's probably has to do with the strength in the dollar.
Macro isn't my forte, but I understand the drivers and if the dollar continues to stay bid, you could make the inverse argument of course, look how well gold has held up with how strong the dollar is. Well, fair enough but if gold is really going to take off and make new highs, I think you want to see it trade a little bit better or the dollar potentially come off. I have a