Home Alternative Investments Two views on whether the stock market has hit bottom

Two views on whether the stock market has hit bottom


Not likely, says Karl Chalupa, of Gamma Investment Consulting LLC. Chalupa previously worked for the Federal Reserve, ABN AMRO Bank, State Street Global Advisors and a $4.5 billion alternative investments firm, and managed his own $400 million quant global macro fund. He now presents his views through a new publication called Gamma Macro and Equity Intelligence Reports.

The goal of the publication is to deliver institutional quality investment research based on the firm’s quantitative Gamma Global Macro Model to both institutional and individual investors.

I’ll come back to his methodology momentarily.

Aaron Uitenbroek, founder of i10iQ newsletter, is in the same camp as Chalupa. Now is not the time to buy, he says.

Wait until “the long-term bias transitions from BEARISH to NEUTRAL according to volume-at-price analysis,” explains Uitenbroek.

Uitenbroek, who has over 20 years of experience analyzing, trading and providing market advice to clients, publishes i10iQ (i10iq.com/), which serves institutions, advisers, hedge funds and investors with market analysis and actionable market intelligence.

i10iQ research and analyses utilize volume-at-price data and auction market principles to correctly identify market biases and effective market timing, and locate asymmetric trading opportunities.

Chalupa uses a different methodology, based on proprietary fundamental measures of “fair value.”

Chalupa’s valuation approach isn’t based on popular measures like the P/E ratio, the CAPE ratio and market value-to-GDP. “The problem with those measures is that they tend to be incomplete because they don’t take into account all three components of equity pricing: earnings, dividends and discount rates,” explained Chalupa.

What is included? “Our valuation measure is derived from a unique nonlinear model that uses a combination of forward earnings, dividends and the yield curve to determine where the index should be trading if the data is properly discounted,” explained Chalupa.

All of this leads to a current read on the market as overvalued, which leads to the conclusion not to buy just yet. And that leads to the next question: “How far will these markets drop based on the valuations, and when will that occur?” The only way to tell how long the downturn will last is to continue to update valuations as time moves forward.

Based on Chalupa’s model, both the S&P and the Nasdaq are still overvalued, even with the declines they’ve experienced year to date. The Nasdaq is still about 23 percent overvalued (an estimate projected with 0.8 standard deviations), and the S&P 500 is about 12 percent overvalued (0.5 standard deviations). Combined with rapidly slowing money growth and higher interest rates, that means more downside is in the picture.

And, of course, this discussion also leads to this question: Should you sell your holdings to avoid further losses? Chalupa believes that the combination of overvaluation and contracting liquidity will put further downward pressure on stock prices. He notes that Gamma’s S&P 500 and Nasdaq models have been largely neutral or short since December 2021.

The S&P 500 and Nasdaq models are part of the Gamma Global Macro Model, which has been in use for 35 years and predicts returns for 64 different markets across four asset classes.

Uitenbroek’s view: “There are multiple factors holding sway over the stock market currently, not the least of which is future Fed actions. The current rally is vulnerable to failure and reversal if the buyers that have come in since the latest low are pressured or if new developments and data suggest that there is more inflation fighting to be done. Presently, I am in the camp that more hikes will be needed to tame inflation based on the historical precedent that a mild Fed response has never tamed an inflation problem akin to what we’re seeing. If future inflation data doesn’t show a cooling, the present rally would be in jeopardy, in my view.”

These are two points of view; there are many others. For example, William O’Neil + Co. (williamoneil.com) sees a confirmed uptrend for U.S. stock markets.

To explore Gamma Intelligence Reports or to subscribe/request a 30-day free trial, visit www.gammaic.com. For more information on i10iQ, go to tinyurl.com/3epy2hud.

Seasoned Investment Counsel and award-winning columnist and author, Julie Jason, JD, LLM, promotes financial literacy and investor protection. Read her latest book, “The Discerning Investor: Personal Portfolio Management in Retirement for Lawyers (and Their Clients),” published by the American Bar Association. Write to Julie at readers@juliejason.com. While all questions cannot be answered, each email is read and reviewed and can lead to discussion in a future column.

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