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ASH BENNINGTON: Welcome to the Real Vision Daily Briefing. It's Friday, July 1st, 2022. I'm Ash Bennington joined today by Mark Ritchie II. But first, let's take a look at what happened in US equity markets today. I would call things pretty much flat-ish out there, moving a little bit here at the close. NASDAQ looks like it's up about 0.90%, S&P 500 up a little over 1%, and Dow Jones Industrial Average up a little over 1% as well here on the day.
Let me give you some of those numbers, closing out. NASDAQ here above 11,000, 11,127, S&P 500 closing out at 3825. Relatively passive day here in markets. But obviously, lots of breaking news, particularly on the crypto side to talk about. We've got Mark Ritchie here with us today. Mark, we were talking a little bit off camera, we're both champing at the bit to get on the air, lots to talk about, what's going on? First in US equity markets.
MARK RITCHIE II: Ash, good to be with you. Way to kick off a holiday weekend, at least for those of us in the US. Yeah, we have some interesting things to talk about. As far as US equities are concerned, I would best describe things in a state of no man's land. So, if you look over the past few months, we've gone from people doubting whether we were in a bear market to that is now-- there's nobody arguing that anymore because the textbook definitions evolved in that.
The question from here becomes how severe is this going to be, the cyclical versus secular? Ironically, I think the last time I was on, somebody picked up a recap of the Real Vision headlines saying I called for a secular bear market. For the record, I didn't. However, the conditions are potentially there. So, the things we're looking at right now, we can get in on the fundamental and the technical side, where would you like me to start?
ASH BENNINGTON: Well, let's start with the fundamentals. One of these questions that's been floating around is not just whether we're in a bear market. As you say, that one's been answered. But now, the question of are we in a recession? Cathie Wood out a couple of days ago, earlier this week saying that we are in recession, lots of our guests saying we are currently in a recession, of course, the official definition of recession is dated after the fact by the NBER, the National Bureau of Economic Research. But when you're in a recession, it's the old joke, you're in a recession when you think you are. And there are a lot of people out there right now who think we are.
MARK RITCHIE II: Right. And that's a really good point. Your point about lagging, I would love to even take that a step further is to say, normally, by the time you have, specifically job losses, or these larger negative GDP prints is usually towards the end of the move in terms of equities lower. So, without jumping in a camp, and this is where I'm trying to stay agnostic and have an open mind in terms of, I don't have a hard opinion on recession or not. But here's what I would say is most important I think for people to be watching.
If we don't have a recession, according to our work at Minervini Private Access, historically speaking, we're probably close to the lows. Most cyclical bear markets where we don't have a recession correct in the neighborhood of 20% to 25%. Well, we're there. The taxi has already taken us to that location in terms of at least if you look at the historical percentages. So, that means this market is potentially bottoming if it hasn't, it's in a bottoming more or less process.
Obviously, the elephant in the room is, well, what if we have a recession? Then it's going to depend, of course, on the duration and the depth. Now, let's say to your point, we're already in recession because Q1 was negative, and I think Atlanta Fed came out this week and revised down Q2. Well, let's say we're in a recession right now, and the Fed quickly backs off. I still think you could be in that bottoming scenario and that is a scenario I think investors need to have at least an open mind to.
This is where flexibility is everything. I think it's very possible we have another large leg down. I also think it's very possible we're putting in a bottom. And I'm trying to hold both those intention and then look at obviously the fundamental data as it rolls out, but even more importantly, the technicals. So, if you want me to make the strongest prediction I will make about the US equity market right now, and this is recession or not, but if we do have a recession, everyone needs to understand one thing.
Bull markets are born out of recessions. So, you should not be afraid of a recession. That is, of course, assuming you manage your household well going into it and you don't get clobbered or haven't gotten clobbered to this point. I've been talking about cash and the value of cash for a while. The other point I would make though is, the prediction I would make is that if we're going to have a recession at some point, the market will actually look through the recession and everybody will probably not believe it. And that's the trap in my opinion.
And when I say I'm trying to stay flexible and open minded is meaning I'm trying not to get married to just a fundamental narrative so that then you miss a major opportunity. And that's actually what-- if you were to ask-- gun to my head, ask me, what do I hope was going to happen, I would hope the data gets really bad and the bearish just gets end of the world, and then the market in terms of its price action starts to tell a different story. This is precisely what we had after COVID about two years ago. And historically, the market bottoms on average, three to six months ahead of the economy.
So, when things look bad, it's often when the market starts-- if you look at the bottom in March 2009, you look at the bottom in March of 2020, and some of these other cyclical and secular periods. So, I would just have an open mind. Now, we can get into the technicals in terms of what am I going to look for in terms of a change of character that would make me say, wow, sit up in my chair and go, it's time to potentially look to get more aggressive, because right now, I'm very cautious and very defensive.
ASH BENNINGTON: Yeah, many good points there. Let's unpack some of that. Talking about really bad data, the Atlanta Fed Nowcast out today, minus 2.1% print on GDP. Obviously, this is a leading indicator. This is an attempt to estimate using high frequency data series what the GDP print is going to be. There's definitely some variability, especially when things swing around. But as you say, a very negative sign.
Second, the point that you made, such an important one, something that we talk about on Real Vision, a great deal, this notion of the challenges when things are moving badly against you. The important points, things like asset allocation, position sizing, risk management, understanding the risks inherent in leverage. All of these conversations that investors, folks who've been in the business for some time are really at the core, not just about picking which stock is a winner and which stock is a loser, absolutely critical for investors to know.
I also wanted to pick up on something else that you mentioned there, which was, of course, Mr. Minervini, a conversation that you had with Mark Minervini today, actually aired on 6/14 but very relevant to what we're talking about right now. Let's take a look at that conversation right now.
MARK MINERVINI: Now in a bull market, if you happen to get the bull market right early on, and you buy a bunch of stocks, and you have a big bull market, yeah, you're going to probably do really well being diversified. However, two things. One, when the market goes down, and you're in a bear market, diversification is not going to protect you.
MARK RITCHIE II: Yeah, because correlation goes to one.
MARK MINERVINI: It's just going to dilute you. But the problem is, is it doesn't protect you on the downside, and it dilutes you on the upside. So, the key is to, instead of being diversified, back to your point also that you said in the beginning, you said to have that low risk, you have to have your timing really well. That's a big part of it. That's a big part of it. So, if you're going to have the big positions, then you have to have your timing well, and you have to have the risk under control, and they go hand in hand.
In order to keep the risk tight, you have to have your timing. If you have your timing right, or you have a good timing, and you have your risk under control for when your timing is off, you can take the big positions. We don't take big positions all the time. When things are working well, we take big positions. And I go back to Stan Druckenmiller, because I am a big fan of Sta, and he said that, and Soros said that to make money every now and then, you got to be a pig.
ASH BENNINGTON: Diversification will not protect you. Picking up on a point that you made earlier when you were talking about this challenge with the historical correlation between equities and fixed income breaking down. Obviously, a conversation that you had with Mark Minervini here on Real Vision, how would you characterize your big takeaways from that conversation?
MARK RITCHIE II: Well, there's a lot of them. And obviously, we're going to get into maybe even more specific risk management when we shift to crypto, but if you look at this bear market, since it started in November, and I'm not trying to evangelize any type of risk management strategy, but one I have been an evangelist for is just the idea of simply cutting risk when things are not working or raising cash, cash is a position. So, let's look at the other alternatives.
Stocks and bonds. Bonds as a hedge versus raising cash has not performed well. Precious metals, not performed well. Volatility strategies, volatility has probably, unless it's been very niche and specific, volatility has just stayed in that slightly elevated, but never giving you that big outside burst where maybe your tail risk guys had a good run. There's not been a position like cash.
So, the idea being for me, this is where I don't hold it arbitrarily, I hold it at opportune times. And that was Mark-- diversification has been one of the worst because in a bear market right now, 85% of stocks in the NASDAQ and the NYSE are trading below their long-term moving average. So, if you have a large, diversified subset of that, you're probably performing in kind with the averages, if not worse, because some of those negative tails are much worse than the positive ones.
We know that areas of the NASDAQ are down 80%, 90%. If you're hiding in commodities in some of these cyclicals, they worked for a bit. But even now, some of those are coming under pressure. So, this is where some type of cash allocation or strategy to move into cash, I think is essential.
ASH BENNINGTON: Yeah, I'm looking right now at my Bloomberg worksheet where I have all the indices tracked across multiple time horizons, as we were saying at the top of the show, NASDAQ Composite up about 0.90% on the day, we should say, on the week, down about 4%. Year-to-date, off almost 29%. One year a little bit better off 23%. S&P again up today about 1%, down about 2.5%, 2.3% to be exact on the week. For year-to-date, off just a hair's breadth under 20% year to date and off 11%, almost 11%-- actually over 11.5% on a one-year basis.
MARK RITCHIE II: Yeah, well, the nature of this bear market has been more of the grinder. It is just, it's grinding you down, giving you a little bit of hope and then grinding you down. And that has been really what we've seen all year. The question, of course, depending, again, like we talked about on the economic data, do we get some type of a swifter leg down that maybe gives some people a sense that we put in a capitulation? I'm not sure.
I can easily see a scenario where we do, I could see a scenario where if we continue to go lower, it may just be same song, add a few more verses. So, really, this is where you got to look at things one day at a time, I will say on the technical side. Every accumulation attempt we've had, and what I mean by that, and I've talked about this a bit before, is when you get a valid rally a few days off the low confirmed by some volume, those have all been sold into.
Just for a little bit of history, I read a report this week from William O'Neal and company that said every bear market back I believe to 1970 usually has six or so on average such failures. I think we're on number five right now. So, again, we're right in that average of what you would expect to see in a bear market, whether it's cyclical or secular. We may see more. Lately, the first couple of rallies where we're able to retake the 51 retest and the decline in 200, right now, we weren't even really able to retake the 20-day.
So, this market is oversold. But again, it's just the no man's land. And the last point I would make though is this is where if you get some type of more systemic shock or issue, things could really come unglued because liquidity is poor. So, I want to be careful that while I'm holding both things in tension, the worst-case scenario would be some type of maybe it's a credit blow up, maybe it's a sovereign blow up where all the aircraft has lost lift. That's what will take you into a nosedive.
For people that weren't around in 2008, we were in a bear market before Lehman failed. Then Lehman failed, and it was just a bloodbath. So, not calling for that. I think this is where the guy from ECRI would say there's an open window of vulnerability for a bigger issue. Well, I would tend to agree with that even on the technical side, you don't have a lot of strong technical support under this market. And the liquidity is quite poor. So, if we get a lot of heavy volume selling, there's only one way for things to go.
Now, again, if I see the opposite, and this is where what I think folks should be looking for on the upside is, do we get some type of positive breadth thrust? And there are a number of drivers, there are also some bullish narratives. And there's some things like a ceasefire or some type of agreement that will definitely, I would think, produce a relief rally. I want to see what do the technicals in terms of breadth, volume look like underneath?
I also think coming into the election, without getting into the politics, I think any type of political gridlock is generally bullish, if of course, we get some type of a red wave, assuming that ahead of time. So, those are a couple. Again, keeping an open mind to both sides.
ASH BENNINGTON: Yeah, so much to talk about their. ECRI, of course, our old friend, Lakshman Achuthan, it'd be great to get him back on to talk about some of these cyclical aspect. Just looking at my screen here on the day. data that came out. So, Eurozone has hit record inflation highs. Now at 8.6%, up from month prior, 8.1%, a significant hot inflation print in the Eurozone. Additionally, we have the US manufacturing index, the ISM index, specifically decreasing to 53 this month from 56.1 last month, this is a high frequency data series that many people look at as a leading indicator of potential economic growth, particularly Raoul Pal, our CEO and founder at Real Vision uses that series very much to think about how he sees growth shaping up.
So, some negative indicators, as you said, some indications in your words, that the aircraft may be losing lift on both sides, really, of the Fed's dual mandate. On the one hand, decelerating growth. On the other hand, global inflation rising, price pressures, supply chain challenges, pressure on prices.
MARK RITCHIE II: Let me just end too maybe with the US on a couple of positives or other things for people to be watching. So, we did have on June 13th, we had a 60 to one or more than 60 to one down volume day on the NYSE. That's tantamount to someone vomiting or purging if you will. The good news is often those happen near bottoming processes. The bad news, of course, is sometimes they come in clusters. So, there may be-- if you have the flu, sometimes one purge isn't enough. So, there may be more.
The sentiment is getting very bearish, very bearish. I think AAII is now or last week hit the worst in 40 years. And then looking at some groups. Biotech is starting to buck the trend. That's an area I have folks watching. And as crazy as it may sound, China looks like it might have bottomed. So, if we've made a low, a contrarian place to potentially look would be China if that continues to trade well. So again, in the bottoming scenario, those are the areas I'd be looking at.
ASH BENNINGTON: Okay, Mark, we've managed to hold ourselves back for a full 20 minutes. Talking about crypto, this is something that we were talking about off camera, some breaking news here in the space, Voyager Digital suspending redemptions right now, today. This are stories that we've seen. We saw it in Celsius cefi lending platform, we recently also saw it, of course, at CoinFLEX. I wanted to make reference to a conversation that I had today with Mark Lamb.
This is the CEO of CoinFLEX, who came on Real Vision and answered a whole series of questions. We spent about an hour walking through some of the challenges that they're having over there in detail. I think it's the most detailed interview to date that he's done where he really gets into the granular details about what they're doing. This is a special report, CoinFLEX Fallout, that aired on Real Vision today. It's available on the Real Vision platform, on Twitter, on YouTube. Let's take a look.
MARK LAMB: This is something that most exchanges do. They have nonliquidation accounts that are institutional customers or large whale customers. This is something that is commonplace not only in crypto, but also in the traditional financial industry. And although it may be commonplace, it's still not something we should be doing going forward. It's in hindsight, we would not have done it in the past.
The reason for an account like this, the reason for an arrangement like this is it enables the customer to trade with more confidence that they will not be liquidated and keep cash on the sidelines in order to fund