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On September 14th, 2007, Northern Rock Bank failed in the UK. Nowadays some people mark that as the beginning of the end of the market boom that had been going on. But at the time no one seemed to much care about a bank failure triggered by the commercial paper market refusing to roll over Northern Rock’s debt used in the frenzied mortgage-backed-securities market of the day. The stock market was decidedly higher a week later. On March 17, 2008, Bear Stearns got bailed out by the Fed and then bought by Chase. People had been concerned, but again the market seemed relieved and headed up. On July 12, IndyMac failed. The market dropped on the news, but once again recovered within a week. Then, on September 15 Lehman Brothers went bankrupt. Finally, people panicked when Congress refused to approve a bill in late September that was perceived as bailing out Wall Street. Even when Congress did approve a bill in early October, the market didn’t recover and started a sustained downturn. At the end of February 2009, a modest negative GDP revision for Q4 2008 sent the market down another 7%. Overall, from September 2007 to March 2009 the market dropped 55%.

Why is it that sometimes major events are ignored, while at other times a minor event triggers panic? It’s hard to say, but some people point to “socionomics” or investors’ “mood” for judging the potential market impact of an event. The basic idea is that instead of events governing the market’s mood, mood governs events (apparently mood is also the foundation for Elliott Wave Theory technicians, a system about which I know little.)

At the least, I’d say I have a hard time coming up with a better idea for why sometimes events have a big impact and sometimes they have no impact. If you’re curious (and I read it a long time ago) I think Peter Atwater has a pretty good description of this phenomenon in his book Moods and Markets. Personally, I think of this to some extent as the “seasons of the market.”

In the market spring, we’re just starting to emerge from winter, and people are still jumpy, but events are calming down so most downturns are better to buy. People are still nervous about the market, so they’re still doing their due diligence research work and being fairly cautious. Memory of the winter has people generally cautious and careful.

In the market summer, things are starting to look better. There can be storms and surprises, but mostly things are relatively calm. People start getting comfortable, and any panics are getting short lived. People‘s moods become more long term oriented, so they’re willing to give things a longer leash and try more risk. Trends can start to really emerge here.

In the fall, we’re starting to get occasional hints that winter is coming, but at the same time the season is still pretty warm as we come off of summer. I’d say market fall represents peak complacency. Bad things can happen at any time (call it a cold snap,) but things have been warm for so long that they’re quickly forgotten. Volatility shrinks, people stop worrying, stop doing research on positions, and tend to get pretty complacent. Risk tolerance is high. However, it’s also when you can get some surprising divergences. Expectations are high, so missing them hurts, particularly when valuations are high and most companies look good. We also start to see increasingly popular and unpopular areas of the market.

In the market winter, the long dreaded (by the few looking forward) hard times come, to the surprise of most. At first it gets denied, but ultimately conditions get recognized. People get scared and start jumping at shadows and worrying about events that usually would be ignored. People are tight with their investments. Who cares about the future when there’s so much to worry about right now? In the fall things looked rosy, but now, just a little while later, it looks pretty scary, all the more so because the difference is too stark.

What do you do with this? I think it’s a useful insight to keep track of. Depending on the season, you can expect different outcomes from the same event. Where do I think we are? I’d say fall, which is probably the least predictable time, particularly on an individual stock basis.

Why do I say that we’re in the fall? I think you can look at it from a variety of angles, what I call the four pillars of investing – macro, fundamentals, sentiment and technicals.

From a sentiment perspective, most factors are pretty bullish. Volatility is at historic lows. Hedging isn’t happening much at all. Cash at funds is around lows. On the qualitative side, we have BTFD as a mantra and unicorn investing (a mythical business with no performance record but a market capitalization above $1 billion). Additionally, tenuous news, such as tax reform, gets quickly and immediately anticipated and assimilated into stock prices. Seems like it’s all good.

On technicals, we’re working on what by some measures is perhaps the least volatile year ever. That’s consistent with the ‘no worries’ fall season. Drawdowns don’t exist.

On fundamentals, we are still posting decent numbers, but we’re also seeing some misses really get hit hard.

On macro, economic growth has been on an upswing for the past year. Depending on how you measure it, you could claim the big picture has been improving for a long time.

So if it’s fall, winter is next, right? Sure, but when? Of course it’s hard to say, but with the information we have, we can take some guesses.

Sentiment, at least as I look at it, is a fairly short term indicator, so I don’t think you can take much from it for the longer-term. From current bullish extremes it doesn’t look easy for sentiment to get any better for the next month or two. An easy sentiment data point to check is the CNN Fear & Greed index, which hit 96 last week, which indicates extreme greed and is tied for the second highest reading since 1998 (hat tip to SentimenTrader.) Again, sentiment is short term oriented, but it’s hard to get excited about the short term getting any better with this data.

Technicals continue to make new highs, so the trend is intact. As long as the trend is intact, it’s pretty hard, at least from a technical perspective, to say that the top is in. Of course anything is possible, but technicals currently aren’t particularly concerning for the longer-term picture. That’s the trend, but what about any technicals exhibiting extremes? You can look at shorter-term indicators, such as RSI (Relative Strength Indicator) to see that stocks are very overbought, which is concerning in the short term, but that’s it.

Fundamentals? The third quarter 2017 that is just getting reported has somewhat easy comps vs. 2016. That said, expectations seem pretty high in many places (you can see this where companies report strong earnings but the stock does very little). Things only get tougher from here, though. Next quarter gets tougher (though not too tough,) and after that comps keep getting tougher.

The macro story is a bit similar. We should probably see a continued modest GDP growth trend into the first quarter of next year, but after that it gets progressively harder.

What do I think this all means? I don’t think you want to put too much faith in these four pillars estimates, as it’s all just part of a larger mosaic. There are plenty of additional factors to consider than just this framework, both market-wide and for individual companies. That said, I’d say what this indicates is that there’s a good chance the near term (the next month or two) could be a bit tough for recent winners and perhaps the market in general. Is this the top? Anything is possible, but I wouldn’t put too much weight on that occurring.

Looking at the fundamental and macro data, I do think the odds of a top next year are high. It’s hard to pinpoint when that would happen. As Keith McCullough of Hedgeye is fond of saying, tops are processes, not points in time. Getting the exact top right might be fun, but it’s not very important most of the time. If I did have to pick a date, I’d tend to guess April of next year. At that point, both earnings comps and macro comps are getting tougher, and that’s around when they’d get reported.

Should we be worried? I suppose that’s a matter of personality and investment process. Do you want to get out in anticipation of a decline or wait until the downward trend seems to be established? Either can work, they just have different levels at which discomfort happens. To me, while I suppose a top in sentiment could mark the highs, the odds of real macro and fundamental problems seem much higher next year. As a third alternative, I’d say you may want to prepare for winter, while remembering that it’s still only fall. Right now things look pretty good, but eventually that will change. Maybe it’s a bit early to really worry with the present weight of evidence, but that time will come. I’d say with a high level of probability (but not a guarantee) that at some point in the next year we should be worried about winter arriving. Seasons change. If you are prepared, new seasons can bring new opportunities.