We’re at a Crossroad

There has now been enough damage done to investor portfolios to bring up the big question: Should I stay, or should I go. (H/T to The Clash.)

As is our custom, we reached out to the traders and portfolio managers who control roughly 20% of the market. What they have to say has weight. Here are the highlights of my conversations with the Smart Money over the last few days.

Of course there is no one-size-fits-all answer because we all have different time frames, risk preferences, and investment goals. But the intelligence I gathered from my sources should provide guidance for your decisions about what, if anything, to do about this hostile market environment.


I heard this from almost every trading desk and portfolio team – this market is oversold. But what does that mean for everyday investors? I think it means that there is no reason to engage in panic selling, because the market will rally from this oversold condition, and that will provide an opportunity to do what the Smart Money likes to do – sell into strength.


Another common theme I picked up from my discussions was the lack of evidence to support the case that a recession is a clear and present danger. The consensus among the Smart Money is that the next recession is coming, but it is probably 6 months or more down the road. That brings up another interesting question.

Is the stock market telegraphing an oncoming recession, or is it just reacting to the policy moves by the Fed to raise short-term rates? And what about the ongoing trade spat between Trump and Xi? These are serious issues, and the stock market does not do well when these types of issues are unresolved.

How the Smart Money is playing it

The consensus is that serious damage has been done to the technical underpinnings of the market. Almost every technical indicator is flashing either yellow or red. But the market does not live or die on technical indicators alone. Fundamentals like earnings and economic growth matter a lot.

On the earnings front, the news is not that great. Analysts have been reducing their forecasts for earnings next year, and the consensus is that earnings will fall short of the expectations investors had at the start of 2018.

Another sore point is what’s going on in the energy market. Oil, and oil related companies are leading the market lower. The question on the minds of portfolio managers is, what does this say about the future prospects for economic growth? They expect economic experts to continue to trim back their growth forecasts in the coming months.


The Smart Money is in defensive mode. They are reducing equity exposure and raising cash. On average, their cash position is the highest it’s been since 2013. Clearly they are worried about the prospects for the equity market going forward, but there is an important caveat to this.

Only a small minority of the people I speak to are willing to call for a bear market. The vast majority are calling for a correction, followed by several rallies, and ultimately the next recession will arrive and take everything down with it.


  1. Paul Carroll

    Just signed up for the all access. How do I get to see the full article above – We’re at a Crossroads 12/20/18?

  2. Post

    Thanks to all for bringing this to my attention, and I apologize for the inconvenience. I depend on you to let me know when something isn’t working properly, and I’m grateful that you reached out on this issue.

    Best regards,

    Erik Conley

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