Reuters Insider - October volatility is "as American as apple pie" but look out for the "death cross" - Vinny Catalano

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29/10/2018 02:06

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Source: Reuters Insider

Description: Redmount Capital Partners' chief investment officer tells
Reuters' Fred Katayama U.S. stocks are still "grossly overvalued" despite the
steep slide. Keep an eye out for the "death cross," he says.
Short Link: https://reut.rs/2PmIwj8

Video Transcript:

Wall Street well off the lows Friday afternoon. The S&P 500 retreating from
correction territory. For more on where the markets are headed and how to play
it, we're joined by Vinny Catalano. He is Chief Investment Officer at Redmount
Capital Partners. Happy Friday, Vinny, and welcome.

Thank you, Fred, a pleasure to be here.

Great to have you with us. What do you make of the price action that we've
seen so far as we head almost to the last hour of trading today?

Sure. Well in general, the expression I like to use is, stock market
volatility in October is as American as mom and apple pie. It happens. It's
the most volatile month of the year. It's not the worst performing month of
the year, but it's in the lower end in the lower half of the year. And this
kind of action, a little bit extreme this month, is not completely to be
unexpected. So I wouldn't read a whole lot into it other than the fact that
you have a grossly overvalued market, that it's been grossly overvalued for
quite some time. And every now and then when you eat, eat, eat, eat, meaning
prices going up, up, up, you have to digest every now and then. Unfortunately,
this digestion is a little bit rough.

Okay. I hope people aren't throwing up at this point. Is there any special
significance to today's selloff given that it was sparked by two of the FAANG
stocks, Amazon and Alphabet?

I would say in general between zero and zero and zero. There is not really
much significance to the action that's here. You do want to, though, a little
bit more seriously take a look at what's going on in terms of peak earnings,
and whether or not earnings have peaked because the key driver for this
market, not that interest rates are on the rise, is going to be earnings. And
if what happened with the tax cut of last year pulled forward a lot of
earnings, and that becomes a problem in terms of earnings progressively
growing year after year. And the stock market is a discounting mechanism. It's
looking six months, nine months, a year down the road. If you had earnings
like a pull bend early, then that could be a bit of a problem. So you do want
to watch whether or not you have peak earnings, not for one quarter for let's
say two quarters, three quarters, then maybe we have an issue.

Well, Vinny, do you share the concern of some investors who are starting to
question the quality of the earnings especially on the top line?

Top line, it's an interesting point you raised earlier, if I can just address
the issue of top line. Because of globalization and innovation, top line
growth does not match bottom line growth. So many companies have benefited
from the fact that globalization and innovation has enabled them to grow the
bottom line a lot better than the top line. And that's a key issue that a lot
of investors really don't spend a lot of time looking at, knowing, and
understanding. It's really extremely important. So I would keep a watch on
that, but top line growth has been and will continue to be a challenge in
terms of impacting the bottom line. And at some point, and it hasn't happened
yet, that bottom line is going to be much more dependent on top line growth.
But we haven't reached that point as of yet.

And Vinny, you're saying earlier hey, stocks are still way overpriced and that
hey, it's October. But do you feel any need for investors to be gripped by
fear before this market turns up? The VIX is at 24 today.

The only point which I would give to be concerned would be looking at market
measures because the economic picture looks pretty good, earnings are
generally fine, interest rates are rising and that's a good thing, and it's a
good thing also because the Federal Reserve needs that cushion, that win. Not
if an economic downturn occurs, it needs a decent level of interest rates to
then be able to cut rates to help to offset an economic downturn. So my
concern would be a little bit more centered on market action. I would watch
price in relation to its moving averages. I'm getting a little into some of
the technical analysis off here. But when the 50-day and the 200-day moving
average start to cross one another and price starts to oscillate and maybe
break through the downside, that's a good sign that problems may lie ahead
economically because the market has this uncanny ability to kind of see
through and see what might happen in the real economy. So that's where I would
be concerned. That's where I would have levels of fear. We've got some
indicators that look like it's moving in that direction, but right now we're
not there. We're not there yet. 

We're afraid of just perhaps the death cross, right, the 50 and 200?

Yeah, exactly. And what you need is also, I had a little clinical at the
megatrend, you need the slope of the moving averages to be to the downside.
The break upside is called the golden cross and the break to the downside is
the death cross. But the thing that you want now is that it's now in a
sustainable downward trend. And if you get to that point, you may get a full
signal, and we have had full signals, and also full signals have reversed
themselves within a couple of months. But if you get that break to the
downside, with the price also break into the downside in the 50-day cross and
the 200-day and then the slope headed downward, respect it because more times
than not it becomes an issue.

Alright, we got pretty technical there but hey, at least we're not there yet,
but something you want to be on the watch out for. Thanks a lot, Vinny, for
joining us. Hope to have you back on again.

Thank you so much, Fred, thank you.

Our thanks to Vinny Catalano of Redmount Capital Partners. I'm Fred Katayama.
This is Reuters, and happy Friday