Don’t Forget the Orange Juice
I’m hedged, not convicted
Kevin McLaverty
On June 9, 2014, with the S&P 500 trading around 1950, I made a small wager (a lunch burrito, to be exact) with Captain K-Mac, a Penserra trading desk colleague, that the broad-based stock market index would tick below 1900 before it would tick at or above 2000. I based my moderately bearish call on the fact the S&P 500 had rallied almost 12% in the prior four months, a market phenomena referred to as a “melt-up” triggered after the index had nearly tripled in value during the previous five years. That was my story, and I put my lunch money where my mouth was.
Six weeks later, on July 24, the S&P crossed 1990. It was just a matter of time, I thought, before I’d be forced to reach into my wallet. But fate, and the stock market, soon turned in my favor, and on August 7 the S&P traded as low as 1904. “Don’t forget the refried beans,” I said to my soon-to-be-defeated deadbeat. Being right is such a heavy burden. Especially if you order the Burrito Grande.
But then, for reasons unknown, unforeseen, and un-you’ve-got-to-be-kidding-me, the market pulled a U-turn and the S&P 500 marched higher like the Russian army advancing on Berlin. On August 25, 77 calendar days after our initial wager, the index ticked at 2000, and I made the long Walk of Shame with slumped shoulders to our local Mexican joint.
Fast forward to December 9, 2014. With the S&P 500 now trading at 2050, Captain K-Mac and I decided to renew our bet, only this time we raised the stakes; breakfast. “Take whatever direction you want,” I said, assuming the forever-bullish trader would take the over. “I’ll take the 19-handle,” replied the Captain, indicating he thought the market would tick at 1999 before it would reach 2100. Shocked and awed, I was forced to take the 21-handle, though I really, really didn’t like my odds. What the hell; it was only bacon and eggs.
FOUR TRADING DAYS LATER, the S&P blew through 1999 faster than the Pretty Blonde inhaling a box of chocolates. “Don’t forget the orange juice,” gloated Captain K-Mac as we watched the index plummet all the way down to 1972. Losing another bet hurt, but not as much as the pain I felt a whopping three trading dayslater, when the S&P rocketed back up to close at 2061. What in the name of Jim Cramer just happened?
Why am I telling you this story? Because when it comes to the present state of the stock market, I’m nervous (two points. One, I wrote this piece over the weekend, before Monday’s meltdown. And two,I’m speaking only for myself and not for Robo or other employees of Penserra). What’s making me nervous? First, the most ferocious rallies I’ve seen in 28 years on Wall Street have occurred during bear markets. And second, two economic red flags concern me: falling commodity prices, and a strengthening dollar. I’m not forecasting a major stock market decline; I just don’t believe in 2015 we’ll hear the phrase, “the stock market closed today at a new record high” as often as we did in 2014. And 2013.
I could also add a third red flag, though this one is more psychological than financial. In the last few months, with nearly every stock market index trading at or near all-time highs, several people have come up to me and said, “You know, I’ve stayed on the sidelines long enough. I think it’s time to get back into the market.”
Good luck with that. And don’t forget the orange juice.