Romulus Report: The big money is spooked by inflation

MARKET Watch

It sometimes helps to look at what the other side is doing. Walk in their shoes, see what they see, that sort of thing.

This is especially true when the other side represents trillions of dollars of assets and it determines which direction markets will go in the long term.

Individual investors have been part of the markets as long as markets have been around, but we are not the axe that fells the tree.

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The Harvard endowment manages $50 billion. The California pension fund is more than $200 billion. The Norwegian sovereign wealth fund has over $1 trillion. All the money represented by all the individual investors and traders managing their own portfolios doesn’t come close to matching the money under management of just these three operations. And there are thousands of other institutional pots all over the world. Colleges, hospitals, museums, faith organizations, and special interest groups also have lots of money in the markets. These are the dinosaurs that leave their prints on the terrain, which we try to follow.

From 2006 through 2010, I was on the board of directors of a large museum that had around $300 million in an endowment. Per IRS non-profit rules, 5% of this money was spent each year for the benefit of the museum, situations like cost defrayment of exhibits and upkeep of the infrastructure. The museum invested the rest of the money in assets such as stocks, bonds and commodities. My main responsibility as a board member was to sit through quarterly investment meetings where fund managers would talk to us about their recent performance and show us how they were going to make more money for us down the road.

Since stumbling across the discipline of technical analysis of market movements in 1997, I’ve always known this method was vastly under-utilized compared with the most popular market analytical method, fundamental analysis. When I joined the Market Technicians Association in 1998, we had 350 members from around the world. At the same time, the Chartered Financial Analyst society had 200,000! Vast improvements in charting software over the years has changed that metric a little, but the analysis scale remains heavily tilted to the fundamental side.

The large institutions I mentioned earlier still do not know much about the technical analysis we employ in this column. They seem aware of the 200- day moving average and that is pretty much it. In the quarterly meetings I attended for the museum there was absolutely no discussion of uptrends, support and resistance levels, or volume of shares traded. It was all financial considerations like earnings estimates, industry growth rates and debt ratios. The Norwegian sovereign wealth fund does not make a single decision based on what they see on a chart.

One of the most important data points for a large institution is the current and possible future position of the US federal reserve.

There are countless hours and billions of dollars spent trying to figure out what the Fed is going to do. Even in the current climate of telegraphed moves, big money knows the fed can still surprise the markets. There is a hyper focus on the Fed right now because inflation has been the latest problem.

Big money worries more about inflation than any other problem you can think of. It is a bigger concern than a housing bust, climate change or war. Inflation is at a 40-year high now. The markets are so weak today because of institutional worries about inflation.

Stocks have seen a bit of a lift since May 20th, which means at least some institutions are doing some buying. They believe the fed is going to engineer a soft landing. This happens when the fed raises interest rates for a while without doing real damage to the economy. The institutional playbook here is 1994, 2004-2006, and 2018 when the fed raised rates but the stock market was able to keep going for a long time. They believe there is one more rate increases coming—75 to 100 points in August. After that they think the Fed will do nothing for several months, then cut rates a few times late next year.

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This is the Goldilocks, soft landing scenario. So far, this scenario has not found its way into every institutional quarterly review meeting, however.

As useful as it is to know what the other side is thinking, it is far better to observe what they are doing. This is why technical analysis is far superior to fundamental analysis. When it comes to generating consistent profits, it doesn’t matter what people say, think or feel. The only important factor is what they do.

And so far, we haven’t seen enough big money presence in the markets to suggest that the bear is back in hibernation. It is more likely that he is just resting by the river for a while.

Most of the large institutions do perfectly fine in bull markets, just like private investors and traders make money in bull markets. When corrections and bear markets come around, though, almost all of them lose money.

The reason for this is a discussion for a different day, but occasionally a big money outfit gets it right even in down markets. This year that big money outfit is Morgan Stanley. They called for tough conditions in the middle of February and recently repeated their view for a 6-18 month stock market problem. Lately, there has been a growing chorus of Wall Street worrywarts, with JP Morgan CEO Jamie Dimon saying in late May that he sees a hurricane on the horizon.

I don’t know about a hurricane or an earthquake or a volcano, I just know that big money has not been very interested in getting big in the stock market lately.

Until that changes, I don’t want to get big in the stock market either.

Remember:

Wealth, like Rome, cannot be built in a day. But, like Rome, it can be lost in a day. Watch for future announcements from Romulus about profitable market moves, important indicators, and major market swings. For trading education, mentoring, or to beat the markets with Romulus' trading group, contact romulusteaches@yahoo.com. About the author: In his real-life existence, Romulus started on Wall Street in 1994 and traded for a hedge fund for 13 years. Since 1994, he has called every major market top ahead of time and profited from them, including the break of the Dot-com bubble in 2000, the market crashes of 2008 and 2009, and the Covid crash of 2020. Since 2020 he has been working with investors and traders to actively manage their portfolios by growing wealth, not risk, as a teacher and mentor working with Backpack Trader, a stock trading educational company.