Here’s Why I Was A Buyer Yesterday

Price crash and bear market

24K-Production/iStock via Getty Images

I don’t have a lot of time to write for the public with my responsibilities managing money and putting out pieces for my subscribers, but I thought it was important for me to put something out this week.

I am widely considered a bear. That’s not really true. I’m an opportunist. And, when valuations are historically high, during a monetarily super charged stock market, that is also benefitting from cheap oil and tax cuts, well, I just think Goldilocks needs to look over her shoulder.

Before the Covid Crash, I wrote and recorded messages to “sell almost everything” in February 2020. I then urged caution and introspection as the Fed and the Feds tried to bail things out. Nobody could have been sure that the jumper cables were going to bail out the economic heart attack we had.

Despite all that, I did recommend buying these stocks in April 2020:

That’s a pretty good list. There were also 5 REITs that we loaded into.

We started trimming a little over a year ago and just closed our last remaining position, which was Twitter (TWTR).

Here are the ETFs I recommended essentially at “the bottom” of the Covid Crash:

Again, we scaled out of all of those beginning a little over a year ago and were out last summer.

We used some of the proceeds to slowly accumulate small caps that have been slaughtered, but have been heavy cash for a couple quarters now.

On Monday, May 9th, I did significant buying and cash-secured put selling. I did so based on forward valuations in the small and midcaps getting cheap and the RSI (Relative Strength Index) hitting a monthly oversold signal.

I have started rebuilding positions in ARK Innovation ETF (ARKK) and the Invesco WilderHill Clean Energy Portfolio (PBW) – in place of the Invesco Solar ETF (TAN).

As I said, I’m an opportunist. I don’t have time for fake narratives from traders talking their books or voodoo magic trading gambling systems nobody really understands (go to Vegas to see how gambling really works).

Talk to me about valuations and market extremes. Right now, we are seeing valuations get cheap from the lowest market caps. And, we are seeing market extremes in the small and midcaps.

I discussed quite a bit of what is going on with the stock market, Fed and economy in my last few webinars. Today, I want to focus on understanding this market and why certain things are already a buy, or at least a short-term rebound rally trade. Much of this is from a piece I wrote for subscribers last week.

Valuations Always Revert

What most people don’t understand about valuations is that there is a range that is rational based on interest rates. What is a valuation though? It is the price assigned to an asset for expected future earnings.

So, when interest rates are low, we would expect valuations to be higher given that there is little alternative with yields low. The opposite is also true. As interest rates rise, valuations fall. We are seeing that now to an extent.

It is hard to for people to care about valuations when stocks are rising though. Our psyches don’t allow us to easily “sell into strength.” Interestingly, it is almost always right to hold onto your winners as long as you can. More on that below and in a simplified technical trading piece next week.

Back to valuations. I have written several articles chronicling rising valuations the past few years. Here are two.

Coronavirus Is A Match That Lit The Overvaluation Tinder in January 2020.

S&P 500: Historic Overvaluation Is Tinder Under Stock Market several weeks ago.

Those articles are two years apart and show that valuations went from bad to worse despite the Covid Crash. This was largely on the back of the Federal Reserve and other central banks pumping liquidity into the financial system, which in turn, amped up speculation.

Here is Warren Buffett said “is probably the best single measure of where valuations stand at any given moment.”

Buffett Indicator

Buffett Indicators (

Next are four valuation metrics as tracked over at Advisor Perspectives.

4 Valuation Ratios dShort

4 Valuation Ratios (

What we can see is that valuations peaked recently on ultra low interest rates.

We can also see there is quite a bit further to fall, especially if earnings, which underlie these valuations stop rising or fall due to inflation or other financial shocks – like if Covid isn’t done or there’s more geopolitical fallout from Comrade Putin’s brain drain.

MACD, M2 And Millennials Indicate A Major Correction Is Imminent

Ignore Trader Narratives

When I warned that this bear market was inevitable the past 18 months, I was mocked by know nothing traders and bad investors who told me that interest rates would stay low forever.

As Prince told us, “forever… that’s a mighty long time.”

I think one of the lyrics was:

So, when you pick up that mouse in Beverly Hills, or wherever else you are, you know the one, I’m gonna hit a home run, instead of asking how much you’re going to make, ask how much risk, are you willing to take.

Folks who watch my investment webinars (and now can listen to podcasts), know I rail on “trader’s narratives.” When traders tell you “why” things are happening now, they are just talking their book almost every time, and less than a coin flip to be right.

Why is that? It’s because most traders are followers, not leaders. They follow trends using technical signals. It’s not a wholly ineffective approach as the Turtle Traders and many since have proved.

The problem for wannabe trend traders, especially those trying to get rich quick, is that markets only trend about one-fifth of the time. That leaves a lot of time when they are trying to create a trade rather than letting the trades come to them. That’s a pretty risky proposition.

How do I know that? For over 25 years now I’ve watched traders closely, and I can count on my fingers and toes how many have actually become wealthy trading. And, the IRS tells us that around 80% of traders report losses every year. That’s pretty telling.

What traders are really trying to do is trade, what I call, the middle of the market. That is, the area between the big pivots. In this endeavor, they make a lot of costly mistakes.

Voodoo witch doctors with magical trading gambling systems will of course claim to be right about the market a lot as they sell you their secret box. They’ll even try to belittle you with very demeaning language as they throw so much mud against the wall that some sticks. Look, I was right that time, buy my box!

Here’s the thing, even if they are right in a moment of time, if you aren’t there the minute they tell you “trade now,” you miss it.

And, of course, you’re trade goes in after theirs, so, you lose that way too. That’s actually called front running and for registered investment people is illegal (not that there’s actually any cops left).

There’s got to be a better way!

I suggest thinking about how to make investments around the big pivots and then holding what is a called a position trade. A position trade is measured in quarters and years, not weeks and months.

Ultimately, focusing on the edges of the markets is where huge money is made. Here is a thought from superstar trader, and one of the only people to get rich trading, Paul Tudor Jones:

“I believe the very best money is made at the market turns. Everyone says you get killed trying to pick tops and bottoms and you make all your money by playing the trend in the middle. Well, for… years I have been missing the meat in the middle, but I have made a lot of money at tops and bottoms.”

This is why I have for a couple quarters now pounded the table for you to sell into strength and accumulate cash. It’s also why we are scaling in very slowly, until it becomes sudden at some point.

Follow The Big Money

One of the best pieces of advice I ever got was from my paternal grandfather. He said, “Kirk, if you really want to know how things work, follow the money.”

Seems so simple. It’s not, but it’s right from what I can tell, three decades after getting that advice.

The edges of the market, the pivots, are the peaks and troughs in price. In my career I have found only two things that help us find those peaks and troughs.

The first is found in what the Federal Reserve is doing. Liquidity drives money flows into and out of markets. This is why following the Fed is part of our 4-step investment process.

“Don’t fight the Fed” is a thing, even if there are time lags based on the madness of crowds.

I would suggest that liquidity speaks and sentiment listens, sometimes early, sometimes late, sometimes both, but rarely right on time.

The second is where the “big money” gets interested in stocks. That is, where do the value hunting vultures buy risk investments?

The answer is only when those investments are really cheap and offer a significant margin of safety.

We can measure “big money” interest with some simple money flow and volume weighted quant factors over different time frames. You’ve watched me do it live in a few minutes during my Investing 2020s webinars.

While many quants want to talk about the dozens of indicators they use, it’s just garbage in and garbage out usually. Remember this goodie from Buffett:

Beware of geeks bearing formulas.

What do we need to do to find the pivots? Just watch the “big money.”

Who is the big money? That’s your big institutions, like the pensions and mutual funds. Think CalPERS (California pension system), Blackrock and Vanguard.

The “big money” is also large hedge funds and family offices.

You can read a bit about family offices in Institutional Investor magazine online. Think Rockefeller, Gates, Musk or Johnson (Johnson Wax in my backyard) money. You’re generally talking 9 and 10 figure private investment firms. When family offices change asset allocation, it matters.

Of note, is that big money trickles out of risk investments in the top half (give or take) of rallies. They can’t just sell on a dime because they move the markets themselves.

During 2021 and early 2022, we saw that executives and family offices were net sellers as retail continued to buy the most recent top of the stock market. That was a harbinger of the bear market we are in now.

Inflation Is Today’s Bogeyman

Long-term demographics and technology are both deflationary contributors to the economy. It is the working thesis of my “slow growth forever global economy” argument that I launched way back on MarketWatch. See the 2016 summary here:

Understanding and Investing in the “Slow Growth Forever” Global Economy – Bluemound Asset Management

Keep the slow growth forever global economy in mind for the future. It’ll come back soon enough and is the reason that tech is still king.

Today, however, we are seeing an inflationary surge. It is transitory, for lack of a better word, but the short-term is very painful, and short-term is 1-3 years, not 1-3 quarters in economic time, which is more abstract to our minds than geologic time.

I talked about inflation here:

Macro Dashes – Inflation Is Transitory, Most Prices Are Permanent

What we know about inflation is that it is being caused almost completely from three factors:

  • Oil
  • Housing
  • Supply Chains

While the popular narrative is to blame the Fed for inflation, that’s mostly not true.

Easy liquidity and low interest rates have absolutely found their way into stock prices. That’s been easy to track. That wealth effect has led to higher aggregate demand, but it’s small by all official measures.

My anecdotal evidence on aggregate demand is derived from the poker tables. I will say, there is a lot of money floating around poker tables now-a-days. It reminds me of 2007. So, I do think official figures of the Fed’s impact on aggregate demand is probably understated.

What the Fed certainly did, was enable housing prices to run away. While that’s a significant fraction of inflation, it’s not nearly as consequential as oil or supply chains.

Inflation Roots

Inflation Roots (BLS)

According to BLS, about half of inflation is from oil prices that rose from $0 to $100+ per barrel. Oil inflation is being caused by OPEC+, mainly Saudi Arabia and Russia, refusal to increase output to pre-Covid levels.

In addition, there is the massive shift in energy markets due to Russia’s criminal invasion of Ukraine. While very little oil is being removed from markets, it’ll take at least a year for the energy markets to respond and rearrange deliveries.

The rest of inflation is from backed up supply chains that are largely due to China’s “zero-Covid” policy, a shortage of labor and consolidation that has left few small players to fill the gaps – that last part is an investment opportunity.

I also think it is interesting at least, and informative more likely, that inflation has surged based on actions by Saudi Arabia, Russia and China. It’s almost as if they are doing it on purpose for a reason – like impacting American politics, economic strength and diplomatic reach.

In the short run, we can still make money on energy investments. But, I would suggest investments not directly tied to oil based on this Wall Street wisdom:

“Sell the shortage.”

What does that mean? It means that shortages are responded to with increased supply at some point. We know that another million barrels per day of light sweet is coming online mostly from Texas by year-end. We also know that Chevron (CVX) is working with Venezuela to get more heavy sour for our refineries – that will hit by early next year it looks like.

What Are The Risks Now?

In my view, which is shared by folks such as Mohamed El-Erian (see his recent Bloomberg interview here), there are a few types of risk to consider.

While the trader narratives have been about interest rates, that risk has largely been priced in. We can see it in all the flattening yield curves.

A risk that is still not priced in is liquidity risk. I have talked about this in multiple articles and webinars.

As the Fed tightens liquidity through rising rates, which impact mortgages to margin accounts, we see a higher cost of doing business. This is raising the bar for what risks people are willing to take, lowering potential returns.

In addition, with the Fed cutting $47.5 billion per month, starting June 1st, from its balance sheet, that is another drain on liquidity that was largely flowing into asset prices. This QT could trigger the next leg down in markets.

I don’t think most wannabe traders understand almost any of this. The pros, quants and supercomputers have a better idea though and they are the seeds of the next narratives.

The Fed is a really hard place right now. They are tasked with controlling inflation, but the inflation, as noted above, is mostly NOT from monetary policy – it’s from oil, supply chains and housing.

So, the only real impact the Fed has on cost of living is to deflate the real estate back to more traditional income to housing cost ratios.

If they get too tight though, they will cause a recession in the face of inflation from oil and supply chains.

Stagflation is a real risk.

I talked about how we were setting it up 4 years ago. That’s how far back the roots of the current situation go, and of course, Covid was the wild card that set the dominos in motion:

Here’s What Gary Cohn Sees: Tariffs = Inflation + Slow Growth = Stagflation

So, what about oil and supply chains then? How does the Fed flatten demand, without causing a recession, and, allow capital to be cheap enough for supply chains to build out in America, and, for the oil companies to drill more at least for the next several years?

Simplified, what I am asking, is how does the Fed support the supply-side while flattening the demand-side?

I think the answer is, as I said out loud in a recent webinar, is for the Fed to kick us in the junk and then run away. In less colorful language, I think the Fed will shock the system with higher rates and QT for several months and then suddenly back off come autumn.

On Bloomberg Monday morning, Atlanta Fed President Bostic hinted that I might be exactly right. This had some impact on me moving to add long positions.

Tightening Might Not Be Forever

Tightening Might Not Be Forever (Bloomberg)

Finally, there is also credit risk in the markets given the massive debts many companies have incurred since Covid. That is likely a risk for another day as most of that debt isn’t due until mid to late decade. Keep that in the back of your investing mind though. Eventually, the Zombies have to be killed or at least refinanced.

The Bear Market Ends With Large And Mega Caps

We have seen small caps and then midcaps correct in massive ways the past year or so. Here’s a look at the iShares Russell 2000 ETF (IWM) vs the SPDR S&P 500 ETF (SPY) since early 2021:


IWM vs SPY (Kirk Spano)

But, that’s not the most complete way to appreciate what has happened. If we broaden our view a bit, we see massive destruction from the bottom up of the capitalization scale. That is, small caps and then midcaps have been getting crushed.

Here is a look at a screen I did on Stock Rover with all companies on U.S. exchanges over $500 million market cap that are not part of a major large cap index:

Blood In The Streets

Blood In The Streets (Kirk Spano via StockRover)

Out of 1945 stocks with market caps over $500 million, which has shrunk in the past year, over 1200 have negative returns for the past 1 year.

The S&P 500 has also started to get hit in recent months:

SPY Returns

SPY Returns Falling (Kirk Spano via StockRover)

Of course, mega caps and energy are holding stronger, though cracks in the ice have appeared:

Mega Cap Returns

Mega Caps Last Standing (Kirk Spano via StockRover)

SPY Leaders Mostly Energy

Sell The Shortage (Kirk Spano via StockRover)

I think two important things are in play here.

First, once the mega caps come down in price 20-30%, then the bear market is largely over or soon to be over. Most of the damage will have been done.

That last whoosh down will be the panicky obligation filled old men and index investors who sell at the bottom and feed the vultures.

You don’t want to feed the vultures.

I would also once again say, look for a spot to “sell the shortage” on oil stocks.

We know two things about oil, there’s enough of it that will find its way to markets in the next year or so, lowering oil prices. And, a few years from now, there will be no longer be oil demand growth, and soon after, demand destruction for oil from EVs.

Here, I’ll open myself up to criticism as I semi-famously said I’m done investing in pure oil companies a couple years ago after 20 years of making money in that industry. Did I miss a trade? Maybe, but I invested in Tesla (TSLA) (out in early 2021) and Bitcoin (BTC-USD) (HODLing and buying the dips) in April to August 2020, so, you tell me what I missed.

I like energy investments, but, if something is good for oil, it’s better for a cleaner alternative energy. More on that in coming articles, but if you follow me, then you know some of my favorites.

Opportunities In SMID Caps & De-SPACs Now

The slaughter in small and midcaps that has been happening for over a year over a year now. Former SPACs have been especially crushed.

With word from Goldman Sachs (GS) and others that not only would they no longer help SPACs get issued, but also, wouldn’t help find them deals, a lot of the pre-deal SPACs are going to just pay out their cash balances starting this autumn and through the next year or two.

There is a clear winner here. That money is going to flow into other investments. That money was earmarked to bring private companies public.

Well, a lot of the companies that came public from SPACs, that is De-SPACs, in the past couple years are trading at price to cash ratios of almost 1. That is, they have as much cash on hand as their market cap.

What does that mean. Those businesses are being valued at nearly zero? While some are junk, there are plenty of companies that will grow and are already doing so. Look to the sky to find several satellite stocks (I’ll cover soon).

In addition to the SPACS, let me dwell on a point I made above about market consolidation in an era where we are trying to de-risk America’s supply chain.

We are at a point in the longer-term economic cycle, which I trace back to the early 1980s, where the big have become very big. They have eaten or crushed small market participants.

Some so-called “free market capitalists” will just say that is the market being the market. But, it’s simply not true. When regulation and taxation clearly favor the big players, that is not free-market capitalism. We’re clearly in that spot.

Entrepreneurs who would try to take some market share have been crushed for over 30 years now. See any study of entrepreneurship and you find it’s been on the decline a long time. That might be good for large caps, but it’s bad for the American economy.

There is a glimmer of hope that might be changing. Recent regulatory and taxation changes, as well as, those that might hit soon, have been better for “the little guy.”

I’ll include President Trump in that to an extent and if the minimum corporate income tax gets passed, that somewhat levels the playing field across market caps in both the private and publicly traded realms.

Combined with low valuations on many small caps and round trips or worse on stock prices, there is a lot to like in small and midcaps.

That is why I started to accumulate ARKK and PBW. While not totally SMID, their holdings have been pummeled. I’ll do more detailed ETF write ups soon.

On both of those ETFs I sold cash-secured puts dated for later in summer to capture the massive volatility induced premiums. If put to me, I’m fine with that. If there is a short-term rally here the rest of May, I might take my profits. We’ll see how Mr. Market feels.

Investment Closing Quick Thoughts

When the mega caps finally correct, there’s an easy answer, buy the Invesco QQQ ETF (QQQ). Tech and consumer goods are still king. And, when this inflationary wave is over in the next year or two, those stocks will rock again.

This is a QQQ chart from Margin of Safety Investing in January (see date top left of chart):


QQQ Buy Zone (Kirk Spano)

Our buy zone for QQQ was roughly from $320 down to $275, way back when QQQ was near $400. We’re almost there. We have revised that down a bit since due to the potential for more geopolitical manipulations and shocks to oil and supply chains in the short run.

If you look at the right hand side of the chart, you can see some volume indicators, those are very instructive. It is clear that QQQ could see around $225. I don’t know that it will, but in the past week, the path has unfortunately become a lot more likely.

Finally, remember what I said here, over a year-and-a-half ago:

Will Young Traders Flip The Option Switch To Cause A Crash?

There is some reason to believe that they are becoming more aggressive in their put buying if you follow the put/call ratios.

The same way that young gun traders pushed stocks up, they could push them down, especially if they are on the right side of the increasingly more expensive margin trades.

And, just like with every market bottom, it’ll come with a “WHOOOSH” and a thud.. I think this one will be marked by the market reversing on the smartest short traders who get caught in an epic short squeeze when it becomes evident that the Fed is going to be tighter for shorter.

I anticipate that bottom happens this year. After it does, we’ll be on the run to new highs around the next Presidential election per a very, dare I say, normal Presidential Cycle rally.

Scale in slowly for now, but when you feel the wind and hear the sound, you’ll want to move very quickly with your best ideas.

Leave a Comment