“Anyone can hold the helm when the sea is calm.” I start with this quote to remind myself not to be carried away by the wave of exuberance in the stock markets now.

People may talk about how they make more than 1000% in Tesla’s stock or Bitcoin. And you may be tempted to join the game too. When the market is good, everyone is a genius.

I think when we invest for retirement, we need to stick with our strategy which can generate sustainable and repeatable long term returns. When I look at an investment opportunity, I normally ask myself these two questions :

• If I buy it today and the share price goes down in short term, am I confident and have a good reason that the price will be higher than my purchase price within the next 6 months? (not just sometime in the future)
• Am I comfortable putting half of my life savings into this? (not just a few thousand)

I have been pondering which stage of the market we are in now?

The Great Rotation

When I wrote “Ivan’s Reflection” in November last year, I said the “Great Rotation” to value has started. That is the time when the technology stocks have run out of steam. I was bullish on value stocks such as the Financials and Europe, the two markets have since made 15% to 20%.

Moving to 2021, the banks continued the lead and investors are moving to small-cap stocks. Just this week, we have seen the share prices of many small-cap companies moving up rapidly.

Last month, I wrote,

This is unbelievable but we moved from “mature on optimism” to “die on euphoria” to “born on pessimism” to “grow on skepticism” in only half a year. The traditional market cycle takes at least 5 years to 10 years.

Exactly one year on, I think now we have already moved to “mature on optimism” again and moving fast towards “euphoria”. This is particularly obvious in the US stock market.

Is the market overvalued?

Of course, the market has its reason to be optimistic. The start of global vaccination gives people hope that life will be back normal again. Biden’s sweeping win and Trump’s eventual conceded defeat have reduced the political risks. But even so, we need to recognize stock markets price is a relative value. At this point, most stock markets are overvalued.

Faced with a ‘lower for longer’ policy rates outlook, the attractiveness of fixed income as an income-generating tool has also diminished. With a compressed credit spread, bonds are not cheap either. (lower credit spread has inversed relationship with bond price. Below mean credit spread means bonds are overvalued)

So now I am thinking, is the market going to finish the whole business cycle in just one year due to the unprecedented pandemic and unlimited money printing? It was a scary thing to think about. If you go back to my January 2020 GMC report, I named it “The Last Relay”. Is it happening again?

Tesla and Bitcoins

When the speculation on Tesla’s share price even exceeded Bitcoin, what does that tell us?

So yes, I am quite concerned but I don’t think a recession is coming. I think a short term correction is needed to rebalance the market to have more sustainable growth. Now, I am still searching for the catalyst which will trigger the correction.

A Barbell Approach

I think at this moment, we need to balance the aggressive and defensive positions in the portfolio. So a Barbell strategy may be suitable.

But I don’t think a bond should be used to act as conservative half, given the potential rise in interest rate. I think that we need to have both Growth and Value at each side of the barbell.

On the Defensive side, we need to keep our allocations to technology stocks even if their valuations are at an all-time high. This may sound wrong as most people think tech companies are speculative. To understand this, you need to refer to my August 2020 article – “a better hedge”.

On the Aggressive side, value stocks may make a fierce return this year. With the gradual re-opening of the economy. Traditional companies will see a significant upgrading of earning’s growth, not because of the absolute value but the relative value since the base is so low now.

In Summary

“Ivan’s Reflection” is my monthly investment note. The purpose of this article is to document my thought on stocks markets and investment ideas so I can review if they are right and wrong in the future. The strategy I use is called Global Momentum Compass which I have developed over the years through my experiences of helping clients manage their investment portfolios. At this moment, I think

• The stock market is moving to a Euphoria stage.
• We should expect high volatilities and fast sector rotations.
• I prefer a broader allocation with both aggressive and defensive positions.

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