After equity market strength through Thursday, Friday saw some weakness as earnings and growth fears once again resurfaced. The earnings season has thus far been unimpressive to weak, and the guidance has clearly been more negative than not. I have been discussing for several months that an estimate revision cutting cycle was on the way, and it is now in motion. Importantly, my work suggests we are still in the early innings and turning too bullish BEFORE my proprietary revisions work reaches max pessimism would be premature. This is going to take some time to run its course. The question is, will it be days, weeks, months, or quarters? My analysis is still suggesting that days/weeks is too fast and that multiple quarters is likely to long. Hence, I continue to target 3-5 months as the duration that looks the most likely, based on the history since 1990.
So, my research remains skeptical of rallies while this downward ASM pressure continues, and I reiterate my warnings to investors to watch their overall risk levels, especially if one is sensitive to absolute drawdowns. If one is a relative player or has an extended investment horizon, there are areas of the equity market and specific names that look relatively attractive.
My work continues to suggest that the underperformance of Growth is either in the later innings or has already shifted to outperformance relative to more cyclically sensitive areas. As reflected in my sector recommendations, the key indicators that I monitor are finding relative attractiveness in a combination of both defensive growth areas (Staples and Health Care) as well as traditional offensive growth, which includes the non-cyclical parts of Technology and some single-stock names in many sectors.
The seas are likely to remain choppy for longer and although some forecasters claim that turbulent waters are already discounted, it is my view that a tidal wave is likely to come, and that is NOT yet priced in.
Bottom line from me this week is to continue to be cautious, patient, and alert for opportunities. We are getting closer each day to my expected aggressive pivot point, but unlike the current bullish forecaster, my indicators are still suggesting that our key time is still on the horizon.