SocGen’s uber-bear Albert Edwards has new, fascinating report on about the next leg down in stocks. What makes it particularly interesting is his allusion to trading patterns in Japan.
ZeroHedge has the report:
The secret to making money in Japan was to remember to exit just as most investors had become convinced of a self-sustaining recovery. Investors should have sold as the leading indicators began to turn down (see chart below). They needed to sell despite protestations from economists that we were set for a mid-cycle pause and strategists telling us that the market was much cheaper than had been seen in recent years. In each case the sanguine voices were proved appallingly wrong. Even moderate fiscal tightening would pitch Japan’s economy back into recession and the Nikkei made new lows. At the stock level, my Quant colleague, Andrew Lapthorne, has demonstrated that in Japan value/momentum strategies needed to be replaced by reversal strategies (buying the losers/selling the winners) ? link. The buy and hold era was crushed by the reality of economic and market volatility.
For Japanese investors, it took some time to learn the new metrics of investing. Today, investors have no such excuse. After all, Ben Bernanke tells us we should learn the lessons of Japan and so we must. Though many commentators want to complicate the investment business, we try and keep our advice as simple as possible. The leading indicators have begun to turn down in the US (see charts below) and so risk assets are therefore dangerous. Almost no-one will be willing to predict renewed global recession and no-one will predict new lows in equities. And with the market so bullish (cover chart) a cyclical failure will come as a crushing blow to sentiment. It is time for caution. It is time to sell.