Correction Call and the Cost of Opportunity

Brit Ryle

Posted July 12, 2023

To quote Chris Rock… “that’s right I said it!” 

On Monday, I suggested a correction for the S&P 500 might be at hand. And if you wanna pile on a little, feel free to scroll back through the Pro Trader Today archives…

But – I can save you the trouble.  I’ve been cautious on stocks for the last few weeks as the S&P 500 has broken out to new 52-week highs.

In my defense, I haven’t gone wingnut permabear or anything. I don’t think we’re on the brink of collapse, I haven’t said the U.S. dollar is worthless and I 

sure haven’t recommended gold. In fact, I recently recommended bitcoin for the second time in the last 10 years, which is pretty much the opposite of gold.

Now, I suppose you could say that gold and bitcoin share some characteristics – like, they are both things you can buy that may or may not increase in value vs the USD. And I guess you could say that gold holds a measure of safety over bitcoin since it’s a lot harder for Chechen hackers to steal your gold. But, that’s about it…

Besides, I didn’t recommend Bitcoin because it’s an alternative to the U.S. dollar. I recommended it because Blackrock, Fidelity, Lending Tree and Invesco have all applied to the SEC for approval to launch Bitcoin ETFs. And that means greater acceptance for bitcoin itself. Plus, it means easier and safer access to trading bitcoin.

And because these new ETFs will be physical ETFs – meaning they will hold actual physical bitcoin as opposed to some strange derivatives concoction of futures and swaps – new money coming into these ETFs will put upside pressure on bitcoin as the funds buy more. 

I don’t see anybody trying to launch new gold ETFs…

I also included a call option trade on Block (NYSE: SQ) as a quick way to make some loot on the bitcoin hype (which isn’t something you do if you think the market is about to fall apart.) 

Bitcoin hasn’t done much since I recommended it, because predictably grumpy SEC chief Gary Gensler doesn’t like crypto and rejected the applications. That nipped bitcoin’s breakout over $31,000 in the bud, but don’t sweat it. Blackrock will get what Blackrock wants…

About that Correction…

So, aside from those few weeks back in March when we had that mini-banking crisis, I’ve been pretty much relentlessly bullish on stocks all year (yeah, yeah I know, that and 2 bucks will get me a cup of coffee)…

Then I got cautious, advised you to take a little off the table, and the market has just surged higher, setting a new 52-week high this morning.

I guess I’ll call that irony.

I have a couple thoughts about this situation…

The first concerns market timing. It is one of those basic investment sayings, that you can’t time the market. And in some ways, that’s baloney. Even grumpy investors like Warren Buffett time the market. If he thinks stocks are cheap and likely to increase in value he’ll buy them. Like earlier this year, Buffett got really bullish on Japanese stocks because the Japanese government decided to support the same kind of manufacturing growth that the U.S. did with the Chips Act and the Inflation Protection Act. Plus, Japan’s commitment to keep its rates low to invite some inflation meant that liquidity would be gushing in. 

Buffett was 100% right and he’s made money – probably shouldn’t have sold Taiwan Semi (NYSE: TSM) but whatever.

As a trader, I time the market all the time. I use charts, sift data and project trends and come up with short-term moves that look reliable. Like that Block (NYSE: SQ) trade.

But the flipside of market-timing – the dark side, if you will – was evident back in October 2022. Or March 2023. Or a couple weeks ago when I turned cautious and advised you to take a little off the table…

Back in March, bearishness was rampant. Nobody wanted to buy stocks, and you’d have been hard-pressed to craft any kind of bullish argument. Imagine if you had simply sold everything in January 2022, when it became clear that the Fed was finally going to start hiking rates. 

Yes, you would have protected yourself against some losses and probably would’ve felt pretty smart. But would you have bought back in at those October lows down around 3,500 on the S&P 500? Probably not.

Maybe the January rally would’ve sucked you in, after the S&P 500 had run 500 or 600 points off those October lows? Maybe. And I would’ve endorsed that move. But would you have sold out again when banks started failing in March? And if you did, how quickly would you have gotten back in?

I think you see where I’m headed with this. Market timing should never be an all or nothing thing. You wanna allocate some capital for short-term trading? Great. You wanna lighten up when the S&P 500 hits new highs and get aggressive on pullbacks? Also great. 

But all or nothing market timing calls are dangerous, because what do you do when you’re wrong? Which brings me to my second thought…

The Cost of Opportunity

I will admit: I feel smart when my outlook for a particular stock or the S&P 500 is working. And I feel, um, less smart when I get things wrong. Obvs. Human nature. 

John Paulson was a pretty famous hedge fund guy for a while. He personally made a billion dollars during the Great Financial Crisis, because he was smart enough to see it coming and was short all kinds of mortgage backed securities…

Nailed it, crushed it, killed it…

After the GFC, investors lined up to give Paulson money and he became a bit of a celebrity, doing the financial media and conference circuit. And he became a gold guy. “The dollar is toast. Gold is gonna skyrocket…” To my knowledge, he was never able to change his bearish ways, never got on board the 12-year bull market that took the S&P 500 from 666 to 4800 (!!), fell out of the spotlight and probably has not lived happily ever after. 

Point being: when you miss a market call, it can be very tempting to dig in your heels, double down and say “it’s not me market, it’s you.”

And that will kick off the money-losing spiral into irrelevance. 

I’d much rather change my mind when I get new information. And the simple fact that the S&P 500 did not reverse much from its July 3 when the window of opportunity for a downside move was wide open counts as new information. 

The fact that traders and investors were aggressive coming into this morning’s CPI number tells us that traders and investors are paying attention to exactly what they should be paying attention to. And while I was concerned that the Fed chair Powell might throw us a curveball at the FOMC  meeting later this month (July 26), I’m starting to think that we’ve got curveball hitters at the plate and if Powell hangs one, it’s going over the fence. 

So while I still think we could see a little downside, I also think a full blown 10% correction is much less likely than it was even earlier this week. More likely, traders and investors are going to be buying the dips. 

And with 2Q earnings reports coming in a couple days, my plan is to not worry about a dip for the S&P 500 and focus on the dips for individual stocks that own and/or add to.

That’s it for me today, take care and I’ll talk to you on Friday… 

Briton Ryle
Chief Investment Strategist
Pro Trader Today