ED HARRISON: Mark Ritchie, welcome back to Real Vision. And as you can tell from this bag that I'm holding up, we are doing Skin in the Game, which means I have a bag of riches- gold and silver for a Connect Four. Are you down with playing the game?
MARK RITCHIE II: Absolutely, that's round two.
ED HARRISON: Now, unlike Roger, I won't say it, I'm a terrible player here. So, there's going to be a little bit more pressure on you to beat me.
MARK RITCHIE II: I should let you go first, then.
ED HARRISON: Gold or silver?
MARK RITCHIE II: Silver.
ED HARRISON: Excellent.
I'm here to welcome Mark Ritchie who is CIO of RTM Capital, and we are going to be talking about the equity market over, let's say, the next six to nine months. So, Mark, when we last talked to you, the markets were falling apart, we were going down to what event became a, I would say, a bear market in the United States. And you were very prescient in your calls there. And at that time, you were looking at 100% cash. What's changed in terms of the market environment? And also in terms of your positioning since then?
MARK RITCHIE II: Yeah, great question. So, it's interesting. The previous two times I've been a Real Vision, the first time I was overweight, maximally long in our tactical equity exposure positioning. Last time, I was 100% cash, and literally now, we're right in between the two. So, to answer the question, we're long, but we're not fully long. We believe that the lows are in for now. If you look at what happened on December 26th to the Powell Pivot as they're calling it in the first week of January, we had a major low. And last time I was here, I was saying we needed to see capitulation first before we had confidence that there was a bottom in.
But what made me so cautious was we had a ton of negative volume and negative breadth that was continuing to weigh on the market in Q4, specifically, after October. The market just- it was trading and acting really heavy. We're seeing almost the exact opposite since the bottom and what some people have called the mother of all V bottoms, meaning where the market just came right down and then just came right back. Taking a lot of people, including myself even by surprise how quickly that happened. And I think Real Vision has had a guest or two even talking about different things in terms of a record, like put call ratio spike, we had multiple over 10 to one positive breadth or us.
And what that means is on volume, you had 10 times the advancing stocks declining in a single day, those are extremely rare. And to see them in a back to back within the same week usually signals a major low and since then, the market has pretty much has grinded higher. However, we're not calling or signaling all clear and time to be extremely aggressive yet. So, I'm happy to discuss maybe why that is or what we're looking at. But that's where we find ourselves- in between the two extremes of where I was in the past.
ED HARRISON: Well, when you say you're in between the two, one could be internal factors. That is you're looking at the market from an internal perspective, or it could be macro factors outside of the market, which are the two or both are causing you to have a 50-50 perspective.
MARK RITCHIE II: So, a little of both. So, as I was saying before that the internals and technicals look very good. In terms of specifically volume, there's been hardly any distribution. And what I mean by distribution is unbalanced institutional selling this year. And one of the best ways to look at that is if you look at a weekly chart of say, the S&P or the NASDAQ, you see almost no weekly selling bars, where if you look at Q4 last year, totally different story.
So, for whatever reason, the institutions just are not aggressive sellers right now. And looking at the technicals overall, to me, it looks as though that December low was a huge shakeout. And what I mean by that was there were some previous lows established in January of 2018, excuse me, February, after the big VIX and volatility incident, and then in October, that were undercut, and then the market came right back. What that suggests to me from a technical standpoint possibly is that there was a large transition from weak hands to strong hands. All the weak sellers puked out, and the strong buyers took their positions from them.
Now, it looks as though we may be working our way towards a longer consolidation where we break higher, but I'm not convinced that we're going to do that yet. So, the negative side is the small caps are telling a different story than the larger caps. If you look at the average stock, we're in a bear market. And I was saying last December that we're not in a bear market yet, but it's coming. And you're still not hearing a lot of people use that language, which is surprising to me, because maybe we were only in the 20% correction territory so quickly. And there seems to be this continuing narrative of when is the really nasty bear market going to come.
And we had small caps correct 28% to the lows, they almost lost a third of their value. But they have come nowhere close to making new highs. So, there's a decent amount of supply that is still weighing on that market. And if you look at that chart, by itself, you would say, well, there's no question we're in a bear market. Look at the Dow and the S&P, it's a different story. Why that is, to us isn't even as important is that it is and which is going to resolve itself.
So, one of the big keys, I think, especially even going into the Fed and we can talk about that as well, for us and I think investors want to look at is if the small caps continue to underperform, I think that's going to be a problem. And even statistically, normally, the S&P does not outperform the Russell for this length of time without the Russell playing catch up at some point. You can also see this in like an index like the Value Line Geometric, which is an equally weighted index. So, that means how does it actually feel if you're long stocks?
In the last 18 months, most people, if you're just long stocks in your portfolio, you probably haven't made a ton of progress. And since January of '18, they really haven't gone anywhere. If you're in the average stock, you're probably flat to down. If you're in the S&P, you maybe eat out mid-single digits over 18 months, but there's an awful lot of hair raising volatility. I would lean more toward the technicals are bullish, the fundamentals, I'm still in the camp of we don't believe there's a large secular bear market coming. But small caps are telling us we're in a bear market. So, the question will be, are they going to power us out for another cyclical bull rally in the next six to 12 months?
ED HARRISON: Look at that. You're starting to get that like diagonally thing.
MARK RITCHIE II: Oh, yeah, you like it there, huh?
ED HARRISON: Getting up to watch out for that little piece right there. I used to play this a lot when I was a little kid. But I haven't played it since. Except for when my 13-year-old crushes me. Now it's getting intrakid.
MARK RITCHIE II: Yes, it is.
ED HARRISON: I spoke to Stephen Auth who is the CIO of Global Equities at Federated. And he was saying, it hit a price target at 3100. And if you look at the timeframe that you're talking about, you're just treading water. So, if you're looking at the December bounce, it's just getting you back to even, then you could be powered higher based upon what's happening in the real economy. And that's to a certain degree where the Fed comes into play. Because you were talking about the Fed, the Powell Pivot back in January. Now, when we're taping this, literally the next day, we're going to find out like, is it proof to the pudding? 50 basis points, 25 basis points from Jerome Powell, what's going to happen? And what's the market reaction going to be to that?
MARK RITCHIE II: Well, if I knew exactly what was going to happen, I certainly- nobody knows exactly what's going to happen. I think what's important is for people to have different scenarios in their mind. And what's most important for us is not what just happens tomorrow, you're right, tomorrow's probably the most interesting Fed meeting we've had in quite some time in terms of 25 seems to be baked in the cake. This is the first shift in cycle really since '07, where we went from hiking to on pause, and now looks like to easing.
If you look at what happened back in 2007, it was where things went in weeks to months following that was a little more important than where do we go on that day. And this is where I think investors should be paying attention. And I alluded to this last time that in 2007, when the Fed came in with their first cut, there was this debate about 25 or 50. And you're hearing some of that, I would agree with you that most likely, it's just probably going to be 25. I think there's a possibility though we could get 50. And that would surprise the market. In '07, we had a scenario like that where they went 50. The market, speaking of stocks, loved it for a couple of weeks, and then rolled over really hard. So, regardless where they go, 25 or 50 in stocks, I'm most interested to see how is the response going to be?
ED HARRISON: And what was that rollover due to? In the end, they went 50, they went big, but the market rolled over?
MARK RITCHIE II: It wasn't enough. Clearly enough, obviously in hindsight, it's very easy to say the Fed was way behind the curve, there was a ton of deflation coming. And they needed to do and wound up going from we're at 5% down to zero in almost 12 to 15 months, I believe from that point. It was 15 to 18 months. So, yeah, clearly that was due to much larger secular forces that were pushing the market down. It's very possible that- and this is coming off the heels a recession week around Real Vision, this is something you want to be paying attention to.
So, if the institutions become heavy sellers after the Fed, you need to pay attention. Volume is important. We haven't seen really any volume selling. So, one of the first warning signs is going to be if we get a really bad week or distribution week on large volume, you need to raise some cash. If the small caps, which look like they are consolidating, break down instead of break higher, you need to raise some cash. That tells us that the risk on trade is not going on, it is going further off.
So, the other thing I would watch with the Fed is not just response to equities, but the dollar. If the dollar doesn't weaken and then breaks out, you have I think a perfect tactical trading scenario that traders and even investors might need to pay attention to. And one of the things I often look for that's rare is when you have a market and a consolidation and it breaks out against sentiment. And the best way to gauge how do I know if it's truly against sentiment is it often feels dumb to buy or buy the breakout or sell the breakout because it's so against what people think should be the right thing to do.
So, with the dollar, if the Fed cuts, consensus sentiment should say the dollar goes down, at least in the short run. And if they go 50, it should definitely back up. So, let's take the 50 scenario as a really good example. If they go 50 and the dollar sells off in the short run and then quickly recovers and breaks out to new highs, that is one of those head scratching what-is-happening-here moments where anybody who jumped on the short train is going to get stopped out and everybody else is going to stand back and say, why is the dollar doing this? Doesn't make sense.
And you should buy that breakout. Because it is going to force everybody who jumped on the short train to cover and probably suggest that there is a squeeze in dollars as people like Raoul and others have been talking about, that would tell me that that trade is on if it breaks out in the face of what should be negative sentiment, I'm not saying that's going to happen. It's just one of those scenarios you want to pay attention to. It's not the news, it's the reaction to the news, just as I was saying with equities. If they get even 25 but with really dovish language and the market can't hold and then sells off on volume lower, that would tell me we at least need more time in equities before you get aggressive.
So, volume is going to be really important. You might not really see where the bounce is going to shake out tomorrow. But you want to look at three days to a few weeks out and then see where the bounce of the institutions settling in terms of are they willing to put more dollars at risk right now? Or are they saying, you can have my shares because we're going to step aside?
ED HARRISON: You are a champion. Yeah, this is good. You're thinking about all the logical to do. Just look at that. I see what's going on here now.
We were talking about this a little bit before we started taping about where I think the consensus of view is, what people are talking about. First, they're talking about a lot of the numbers going higher in terms of the real economy. And then even some of the consumer sentiment data, I think we saw a number at 135 versus 125 that came out. And so, what people seem to be saying is that you have the likes of Esther George and Eric Rosengren, who are potentially going to even dissent in a 25 basis point cut world, which would suggest that it limits the amount with which the Fed can move forward with the 75 basis points that people are talking about this year or 100 through 2020. So, if that's the case, and we get that, and how does the market react to that? And what does that mean in terms of where we're going in this particular market right now?
MARK RITCHIE II: I'm as interested as everybody else to see, where are the balance of buyers and sellers right now? I think in terms of sentiment, we could be overbought here. So, if they just go 25 and the language is one and done on cuts for now, it would not surprise me to see the market pull back and not like that. I think there are potentially decent amount of bulls that are looking for a shot in the arm here from the Fed to continue to rally.
ED HARRISON: But for you, the key is not that initial sentiment, it's actually what happens after to the degree that people, the big hands start coming in and buying, especially on the Russell 2000. You think that's a sign that this market could move higher?
MARK RITCHIE II: Yeah, if the Russell- I can't stress the small caps of the average stock enough and some of this relates to breadth too. If the Russell continues just to lag, I think then you're going to see some of these breadth divergences. Where we haven't seen that and what I mean by that is where the advanced decline lines don't really make new highs. And if you study this, those divergences can go on for a long time, but they eventually correct themselves and they either do it through time or price. And that means- so let's say the Russell continues to lag, and we have a smaller group of stocks, the Dow 30, S&P index break out to new highs while the Russell just continues to go sideways, that's going to eventually create this scenario of once the smaller group then gets hit, the entire market rolls over.
If you look historically, that happened from '98 all the way to the top in 2000. So, it can last for a long period of time, big correction '98, NASDAQ took off. In that case, Dow didn't really participate as much. And there are a few things that are even- we don't follow Dow Transports, or Dow theory to a tee, but it's something we watched. The transports haven't confirmed the Dow's most recent advance. So, just there's a number of mixed signals. We want to see more strength is the short answer.
And if managers are going to put fresh capital to work and take risk, the Russell is the riskiest place to go. So, when the riskiest place to go is trading poorly, it just says there's not a big appetite for risk right now. We've had enough positive technicals and decent volume to have as long, we're not saying be in cash, but we're just not ready to really step on the gas. Seasonally though, I think the market is potentially set up for a decent six to nine month period where the opposite of selling may and go away. The period of buying, September, October and hold 'til next May, you may see a decent seasonal run. So, these targets are 3100 S&P, 3400 S&P, those aren't far out of reach at all if the risk on trade really comes back.
And if we don't see some of these severe economic contractions, then I think- certainly, if we don't have a recession and the Fed is easing historically, then the Fed starts cutting, and we don't have recession, returns over the next six to 12 months are very good.