QQQ - Sentiment Can Change... Fast
2024-07-11 05:50:00 ET
Summary
- The SP500 vs PMI, IndPro from Feb 1977 demonstrates the consistency of investor fears vs declines in the SP500 and the many recoveries large and small since.
- The PMI often declines when there is no decline in IndPro (Industrial Production that it is supposed to predict). There are multiple instances when the PMI’s predictive signal occurred after a recession had initiated.
- PMI and SP500 correlations amply demonstrate that making new investments during periods of stress has always proven positive, especially if companies are well-managed.
If there is one truism of investment markets in terms of achieving a lower risk but higher return, it is that one should own what others do not find attractive. Markets have always cycled with investor psychology, and buying cheaply has always proven better than paying dearly for the consensus favorites. Couple buying cheaply with identifying the better management teams in a favorable economic environment and the odds of market psychology turning diamonds in the rough back to main line favorites is a pattern repeated time after time. The metric of Pr/Sales at the lows of the past 10yrs is one which has served well over multiple cycles. A company’s sales do not fluctuate nearly as much as does cash flow or earnings, which are downstream of sales, but Pr/Sales can vary more than 5x during periods of investor pessimism. To position capital when this metric is applied to a well-managed company reduces price risk because low pricing means fewer owners remain to sell. Significant gains can occur when it returns to investor favor. Low Pr/Sales is in many instances accompanied by insider accumulation, and if those insiders have a good business record, they become an affirming signal to which it is worth paying attention. In the current marketplace, pessimism still reigns as the dominant influence. The opportunities remain quite attractive for the consensus, being shocked into the realization that economic activity is better than perceived....
Sentiment Can Change... Fast