Where is the market going to bottom? Just Ask!

“I never guess: it is an appalling habit, destructive to the logical faculty”

--Sherlock Holmes, The Seven-Per-Cent Solution

?

I love guessing games.

Citibank asked a group of money managers to guess where the final bottom will be in the S&P 500. The results are as follows:

It actually conforms to a normal curve, but the right tail is truncated as 16% of those surveyed believe the SPX low was established at 3636.87 on June 17th (not sure why the category is listed as 3639+, but I am not one to quibble).

If I may dredge up basic statistics, roughly 68% of the values under a normal curve is covered by one standard deviation around the mean. That implies all values beyond one standard deviation on either side comprise roughly 16% of the investor population. Therefore, that conforms nicely to their category breakdown: about 16% of investors believe the bottom in the SPX lies below 3000, and about 16% assume the bottom is already in place.

Almost half of the investors expect the low to be between 3000-3400, with the precise mean lying at 3266.

The reason why I like guessing games in the market is the guesses are frequently wrong. That is why I approach these surveys looking at the extremes because that is often where the value resides.

·????????Taking a contrarian approach, even though 84% expect new lows, there is a good chance when we look back in a year, the June 17th low at 3636 may be the low.

·????????Taking a contrarian approach also can lead to a more dire view, and that is that even though 84% expect the low will be above 3000, a sub-3000 SPX may be in the cards.

I am leaning on folklore that the market will do whatever it takes to confound the greatest number of investors. But which 84% will it be?

For that, I can depend on another piece of folklore that I observe all the time—that the market discounts one scenario and then discounts the opposite. We see this all the time on economic releases, or Fed meetings, and so on. The market moves in one direction and then turns on a dime.

Hence, my view is that we will rally now to discount the view the market hit a lasting bottom and then reverse to new lows to discount the other side. This view is supported by the bullish seasonal pattern fueled by:

·????????Corporate buyback season starting up in a week ($300 bln of demand)

·????????Asset managers and levered funds have been net long S&P futures for the past three years, but during the last quarter, their net is now negative and continuing to drop.

·????????Including Risk Parity funds and other players, Equity futures positioning is at a decade low, lower than at market lows in 2015, 2016, or 2020.

It is no surprise with investor inventory so skewed to the short side that after consecutive inflation shocks in CPI and PPI, prices were at a level deemed too low, and we experienced the largest ETF short covering this Thursday and Friday of the last six months.

My bias is on the upside now, but I believe we could reach levels in the coming month that would make it prudent to raise serious cash. We will monitor.

Peter Corey

The Islay Team

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