It’s time to buy gold and dump stocks as the current stock market bubble is about to burst. That’s the view of Crescat Capital LLC, a Denver-based firm with a strong track record of outperforming the S&P 500 and whose Global Macro Fund returned 41% last year. The firm points to corporate insiders’ frenzied stock selling over the past two years as one of the major warning signs. These insiders heavily sold in 2017, in 2018, and now, “the third time should be the charm for the stubborn U.S. market,” predicts Crescat, according to Bloomberg.

The firm’s current hedge fund strategy is overwhelmingly long gold while shorting global stocks. “There is so much more ahead to profit from the short side of the market,” the firm wrote to clients. “The bear-market rally is running out of steam!”

Crescent Capital’s Bear Market Strategy

  • Buy gold, dump stocks
  • 75% of firm’s strategy
  • Sees recession looming
  • Warning signs are insider selling in 2017, 2018 and early 2019

Source: Bloomberg

What It Means for Investors

Calling the 13% rebound in the equities market just a bear-market rally is a clear indication that Crescat thinks economic fundamentals are pointing to the downside. Along with corporate insiders selling stocks, Crescat cites deteriorating economic data and the inversion of the yield curve as reasons to be concerned.

The current consensus is that the economy will enter into recession in either 2020 or 2021, Tavi Costa, global macro analyst at Crescat told Bloomberg. Among that consensus view are Nobel prize-winning economists Paul Krugmann and Robert Schiller, as well as financial commentator Gary Shilling and at least three-quarters of business economists. Tavi, however, thinks the downturn will happen even sooner. “We think [a recession] is a lot closer than that,” he said.

If and when a recession does occur, equities are likely to get hammered on falling earnings. Goldman Sachs, in a recent “Where to Invest Now” report, outlined the average peak-to-trough change in earnings per share (EPS) over the past seven recessions since 1970. The materials sector saw a 56% decline, while consumer discretionary, industrials, and energy all declined by 33%, 20%, and 19% respectively. Those declines were far worse than the S&P 500’s average EPS decline of 13%.

Looking Ahead

While the bulls are currently taking advantage of the market rebound, economic data that continues to deteriorate may affirm the bearish view and deflate the bubble. In that case, investors will want to be short. “Soon the buy-the-dip mentality and bull-market greed will turn to fear. Selling will beget more selling. That’s how bear markets work,” Crescat wrote to their clients.

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