Strategists: buy weakness, not strength

Global stocks have rallied hard in recent weeks, helped by recent reports suggesting cooling US inflation data, but many market strategists remain cautious.

Goldman Sachs last week warned the relief rally in risky assets was “likely overdone”. That was echoed by JPMorgan’s Marco Kolanovic, who said investor optimism should be tempered by “still elevated recession risks” – a notable call, given that Kolanovic has been one of the more bullish voices on Wall Street in 2022.

Certainly, 2022 has been one of those years where it’s paid to sell into strength. Compound Capital Advisors’ Charlie Bilello notes that a trading strategy that bought the S&P 500 when investors were fearful (as evidenced by the Vix, Wall Street’s fear index, exceeding 30) and selling when investors were calm (sub-20 Vix readings) would have returned 25 per cent this year.

However, the opposite strategy – buying when the Vix hit 20 and selling when it exceeded 30 – would have been disastrous, generating losses of 33 per cent.

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At some point, notes Bilello, this strategy will stop working; eventually, the optimists will be rewarded. However, given that market bulls have been burned on so many occasions this year, it’s not surprising that strategists are a little cautious right now.