Say it with me. We’re on the verge of a financial…

Possible Financial Crisis

The words “financial crisis” don’t appear too often in the media anymore. That term doesn’t really appear well in a situation where we’ve witnessed a MAJOR selloff. But with market momentum going red on Tuesday, what appears to be margin selling across a variety of sectors, and significant pressure on FAANG stocks, I’ll be the guy who states the obvious. People need to start acting like we’re facing a crisis…

Wikipedia writes: “A financial crisis is any of a broad variety of situations in which some financial assets suddenly lose a large part of their nominal value.” I cite Wikipedia because that’s what the “truthiness” agrees to be the perception. It’s effectively a crowd-sourced definition. We can all agree that when a bunch of assets lose a large amount of their value – then we’re in some sort of crisis.

Assets Losing Value

Well, inflation is running “officially” at 7.5%, and it’s likely higher. Money market funds are seeing a big exodus of cash because the dollar is losing its purchasing power. Meanwhile, tech stocks are collapsing, and the NASDAQ 100 is off 17.9% since November (just four months ago). It can easily lose a few more percentage points and get us into Bear territory.

I’ve been scratching my head wondering why people aren’t more freaked out about the fact that Cathie Wood’s “ARK Invest” ETF is off almost 50% since November. Then I realized that on the ETF’s site, the YTD figure is actually last year’s performance on the ETF’s site, and there’s no reference to the fact anywhere that it’s been off 34.6% since January 1. 

The fact that we entered a New Year is almost psychologically removing a significant part of our downturn from the equation when we think about the market. We’re only focused on 2022 – and NOT on the cumulative selloff since November. 

I don’t want to be this guy. But I’m extremely worried. The good news is that I’m not biting my nails. I’m not freaking out or staying up all night wondering what to do. I’m focused on my momentum readings in the market. 

Momentum is red. The trigger went Red on Friday. Selling pressure in the S&P 500 exceeds buying pressure. The rest of the 8,500 stocks in the market remain under SIGNIFICANT pressure. About 75% of stocks are under their 50-day and 200-day moving average. Speculative capital has been on the sideline.

The financial media has finally caught up and they’re saying that the bears are in control. But they’re REALLY late. I’ve been talking about this pressure since November. Here we are four months later… and they’re still talking “Buying the Dips.”

The Market is Still Overvalued

Remember, the total market capitalization of stocks trading at the absurd multiple of 10 times sales is still VERY high. Inflation might help pull that number lower, but pronounced selling can and will also contribute to some decline. The S&P 500 P/E ratio is still well above its historical mean. 

Source: CurrentMarketValuation

We have experienced a repeat of part of the Dot-Com bubble. Cheap money made it possible for us to scream YOLO and buy stocks trading at 40 times revenue. We’ve seen this in stocks like DocuSign (DOCU) and Fastly (FSLY) – even if they didn’t have profits. 

And anyone who said “HEY – DON’T DO THAT, WE’VE SEEN THIS PLAY OUT BEFORE” – was called a curmudgeon, a Boomer, or something far worse. The markets will always find their way back to valuation sanity – no matter how long it takes. 

And in an environment like this, I have taken the academic pill of sobriety – fired up the momentum measurements – and turned to the boring stocks that have strong dividends (to overtake inflation). If I can beat inflation this year – and turn out a return north of 8% while the rest of the market experiences a seizure, I’ll be VERY happy. 

Quad Witching Approaches

Listen, you don’t have to heed my warning. You can ignore me, and think that innovation is cheap and that a stupid, unprofitable company like Roblox (RBLX) is cheap because of the Metaverse. But until I see executives buying up the stock with their own money, I’m not touching half this crap with a P/S over 10. (RBLX is at 12.4x). 

All you need to do is check the tape. The most volatile periods of the last year have largely coincided with options expiration dates for each month (Third Friday). 

The last two quad witching days are the dates when we see simultaneous expiration of four asset classes: stock index futures, stock index options, stock options, and single stock futures. These last two days have been horrible triggers for selloffs. Look back at the third week of September and December. 

Can you see the pain? March 18 is the next Quad Witching Day – which comes two days after the Fed is scheduled to raise interest rates. 

I can’t think of too many positive catalysts right now. There’s no more cheap money. The faucet is off. The signal is red for the Fed. They’re trying to clean up the mess, even as the Wall Street Journal writes a glowing recount of their efforts to stop a collapse in March 2020. A reminder: the markets were extremely overvalued before the Covid financial crisis hit.

What I can say is that I’m looking at the threat of a recession from higher rates, seeing layoffs start in the mortgage industry, watching boards stupidly turn down takeover offers, seeing Wall Street celebrate record bonuses, and seeing way too many stocks trading at multiples that didn’t make sense in 2000 and don’t make sense now.

You can throw me out of your party if you want. You can tell me that I’m being too bearish. But I’ve seen this story too many times. Cash is your friend, and so too are the VERY cheap stocks trading at multiples that would suggest a further correction for the broader financial market. 

March 18 will be here soon, and even if we see a relief rally post Russia, we’re still not likely to see any significant abatement in inflation or supply chain struggles for some time. Go for a walk. Enjoy the sunshine. We’ll still be able to make money. It just might require us to think much differently than what we saw in 2020 and 2021.

Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.
Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.

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