Sell In July Before It Gets Ugly May Be the Right Decision

Sell In July Before It Gets Ugly May Be the Right Decision
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"Sell in May and Go Away" didn't work, but "Selling in July Before It Gets Ugly" may be the right investment decision now.

The preconditions for a market correction, as articulated in "My Top 10 Reasons Market Lambs Should Be

Scared of a Slaughter," and even the end of the eight-year bull market are potentially in place. Here's why:

* An Early Seder Might May Be Upon Us: Answer my eight, important questions.

* The Base Case Becomes Vague and Hard to Predict: There are numerous uncertain market, economic, geopolitical and political outcomes.

* Stocks Are the Last Man Standing: While equities continue to be elevated, commodities, the U.S. dollar, high-frequency economic data and the yield curve point lower.

* After More Than Eight Years Of Monetary Largesse, The Federal Reserve and Other Central Banks Are Taking Away the Punch Bowl: The Fed is raising rates and plans to institute quantitative tightening at a time when the U.S. economy faces continued intermediate-term challenges and a weak core foundation. Stated simply, the implementation of emergency monetary policy is a thing of the past.

* Valuations Are Stretched: Most valuation metrics are still in the 95% decile, the difference between GAAP and non-GAAP earnings has never been wider, CAPE ratio at the second highest in history, etc.
I see few stocks and sectors that meet my standard for purchase.

* Investor Sentiment Remains Bullish; Importantly, Few Fear a Larger Market Drawdown: The consensus is uniformly bullish for the intermediate term. Group Stink is alive and well, with many of the same commentators and talking heads who failed to see the 2007-09 market and economic crash confidently talking happy talk in the business media these days.

* The Proliferation of Passive Investing (ETFs, Risk Parity, Volatility Trending, etc.) Raise the Risk of a Structural Breakdown in the Markets: See Something Else Is at Work Here; 'Machine Spirits,' Methinks," "When, Not If, Risk Parity Takes Markets Lower, Remember This Post" and "Don't Think The Machines Could Turn to Selling? You've Forgotten 1987." Investors should be prepared, because when many are on the same side of the market boat, bad things happen (e.g. October, 987). The movie may move in reverse.

Remember the past.

* Though Domestic Growth Is Slowing, Interest Rates Are Likely Heading Higher and the Case That Stocks Are Cheap Against Underpriced Rates Is Becoming Less Compelling

* Europe's Economic Growth Is Moderating, Especially in the U.K: This morning Jim "El Capitan" Cramer voices optimism on European economic growth. While El Capitan's points are well-taken, the high-frequency economic data "over there" may have peaked. According to The Lindsey Group's Peter Boockvar, German jobs data for June was a miss. Yesterday the eurozone manufacturing and services PMI fell to a four-month low even though it's close to a multi-year high. The U.K.'s PMIs have been softer, as have its retail sales data. The May unemployment rate was still at 9.3%, well above pre-recession levels.

This morning, Germany's May factory orders rose by only 1% month over month compared to the consensus expectations of a 1.9% increase.

So, I do not buy the synchronized global economic recovery meme.
* The "Complexion" of the Market May Be Changing With the (T)FAANG Leadership Stumbling: I continue to prefer Soupy Sales' White Fang to Jim Cramer's FANG.

* (T)FAANG and Other Disruptors Are Eviscerating Industry After Industry: O'Reilly Automotive (ORLY) , down $40 a share on Wednesday, was the latest victim in yesterday's trading.

Secular changes will likely depress prospective domestic economic growth and pressure the job markets and extend the schism in income and wealth equality.

There will be many more land mines of disrupted companies and industries. Will the benefits of lower prices for the consumer offset the job decimation? I will let the regulators make those decisions, but this may be a "heads investors lose/tails investors lose" situation.

* The Yellow Swan (the Trump Presidency) Raises a Number of Risks and Little Legislative Agenda Promise. 

* Market Tops Are Processes: And the chaotic (see Rev Shark) machine- and algorithm-influenced market action may spell lower markets.

Mr. Market is no longer moving straight up. There were deep swoons two weeks ago Friday and again twice last week. Today may be the fourth move lower (S&P futures are down 11 handles this morning).
***
Sell in July before it gets ugly.

Doug Kass is president of Seabreeze Partners Management Inc. This essay originally appeared at TheStreet.com.  

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