In their first report of 2018, Ron William and Robin Griffiths, strategists at RW Advisory, explain why US equities are causing them concern.
William and Griffiths compare market conditions to the “calm before the storm”, saying that markets are in “uncharted territory” and are difficult to predict. Their reasons include:
1. ‘Normal’ seasonal cycles and patterns such as the January Barometer, will not necessarily work in the current market thanks to QE and ZIRP. William and Griffiths point out that even the well established 4-year cycle is not apparent.
2. We are in “abnormal markets” and living in a time of “known unknowns” according to William and Griffiths, where major indices have not even had a 5% setback in 16 months and the VIX index is at a new record low. “At some point, this will prove to be the calm before the storm”, they say. “What used to be predictably normal volatility is not apparent anymore”.
3. The St. Louis Fed financial stress index warns of pending bubble-trouble and contagion risk. William and Griffiths think that equity markets are skating on thin ice and it would not take much for the market to crack. They think the recent auction of the most expensive painting ever (da Vinci’s Salvatore Mundi) may be an “irrational exuberance” contrarian signal.
4. One bubble-like market may be Bitcoin, which has experienced a 100,000,000% increase from its original price of USD 0.008, a far greater rise than Tulip mania (50,000%) and the South China Sea bubble (1,000%). Even if it’s not a bubble, there is still significant debate over whether Bitcoin will be the winning cryptocurrency ahead of many other cryptocurrencies such as Ethereum and Ripple. William and Griffiths postulate that Bitcoin may suffer a similar fate to that of Myspace, which fell from grace despite the eventual rise of social network firms, and may have a contagion effect. William and Griffiths think Bitcoin’s latest price behaviour warns of the late-cycle state of the equity market.
5. Up until now the FAANG stocks (Facebook, Amazon, Alphabet, Netflix, Google), tech stocks and Tesla have been the strongest stocks, but Facebook and Tesla are now looking fragile. If Tesla breaks below its 2-year pivot zone between 300 and 280, William and Griffiths think it would risk wiping out its 2017 gains.
6. William and Griffiths recommend staying in the market, but also recommend being alert and ready to exit. Overall, however, they prefer Asian markets such as China, India and Japan.
Read the full report.