Banks are rolling lower!

Since early October I’ve given so many warnings about the stocks market it’s almost making me sick already. No, not because the market might correct or even crash, but because I must be starting to get annoying to all of you. The intention of my warnings is to make you aware that there are risks and that you do everything that’s in your power of protecting your wealth (see Do NOT underestimate the risk). This is why we’re here, aren’t we? Making money is important, but protecting it, this is an even more important task in my opinion. 

Let’s take a look at a banking sector. I wrote a post about financial sector a few weeks ago and that we are looking to short it under the right conditions (see Sectors on the watch to short). I was also going on about yields falling or bond prices rising in the intermediate term (see From yield curve inversion to bond squeeze?). 

What if the FED hikes for the last time this December and pauses with rate hikes next year? What if the natural consequence is that the banks suffer in the same period? And when banks are trading lower it is never a good sign for the stock market in general!

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Do NOT underestimate the risk

I am not one of those guys who were warning you of a stock market crash for the past few years. They totally missed the bull run we had an opportunity to enjoy since the second part of 2016. But some of them will still claim they successfully called the crash! While in fact I was very bullish US stocks until early October this year when I gave a warning something has changed. A warning about emerging markets was given out even earlier.

I am not joining the doom and gloom camp, I am just trying to be rational and am giving a cautionary heads up, because the risks and stakes are getting bigger by the day. This does not mean the market can’t continue going higher over time if the underlying fundamentals and flow improve. But should they not we’re facing a serious market crash risk.

I am one of those who rather takes some of the risk off when events are not in favor and potentially misses a few per cent of the upside than risks additional losses of your capital. With a wise portfolio management it’s much easier to catch up with those few per cent when things improve than it is trying to get back to break even and trying to fix the damage that’s been done. 

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From yield curve inversion to bond squeeze?

Yesterday we got the first US yield curve (3 and 5 year) inversion since 2007. Usually a recession follows within two years but I don’t want to scare you with that. Firstly, it doesn’t have to happen immediately and secondly, if you read any of my posts lately you know that getting defensive is not something we should fight against and in that case you’re well prepared for a case of a downturn.

The point of this post is to point out that we could see a flight to safety, that is into treasury bonds. A lot of people are expecting inflation and interest rates to rise over time, meaning bond prices to fall, including me (see Bond breakdown?). But it looks too many got ahead of themselves so it would be irresponsible to ignore the intermediate term risks in the market. Let me present what I think could happen.

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Keeping a perspective

After G20 meeting when stock indices are gapping up it’s very easy to lose sight. It’s as easy to get excited as it had been easy getting depressed two weeks ago. In this kind of environment one needs to keep perspective. Often the best way is to take a deep breath, zoom out and take a more long term view. Usually the longer you go in the past, the more you will understand the present and the easier you’ll prepare yourself for any possible outcome in the future.

So I would like to share with a longer term chart of the S&P 500 index dating back from 1900 to the present day. 

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