Action: Take profit on the long NASDAQ from
earlier this week (7,300 versus 7,014). Our new position is neutral
Why it matters: The slowdown in macroeconomic data is now no longer “incoming” – it’s here now, in the present tense, and this means that the “buy the dip, courtesy of the Federal Reserve“ risk narrative is no longer sufficient. The Fed is seriously behind the curve, and it's in deep denial as well.
Context: If the market is simply pricing in an adjustment to lower rates, then investors should and will buy the market. This only confirms that the Fed is cutting rates by June. If the market gets the feeling, however, that the Fed is behind the curve and we are at risk of an actual recession, then this is a major
sell signal.
The math: Assume a 50% probability of recession during Q3 or Q4; the average drop from peak to trough is 50% in recession. Further assume that there is 20% upside for the balance of this year.
Given these figures, weighted risk is as follows:
Upside: 10% expected return (50% * 20%)
Downside: 25% expected negative return (50% * 50%) More simply, we see 10% in upside potential with a negative 25% risk at present. It's not a great risk/reward ratio.
