End of the Cycle? (w/ Kevin Smith) | Trade Ideas

TL;DR

Kevin Smith, founder and CIO of Crescat Capital, believes the S&P 500 is in a triple top pattern and overvalued, signaling a potential market top and recession. He suggests shorting the SPDR S&P 500 ETF (SPY) at 293, with a target price of 234 over the next six months.

Transcript

Welcome to Trade Ideas. I'm Jake Merl sitting down with Kevin Smith, founder and CIO of Crescat Capital. Kevin, it's great to have you on the show for your very first Real Vision interview. Thank you, Jake. So before we get into your actual trade idea for today, can you please go over your background, who you are, and what you do at Crescat Capital... Read More

Key Insights

• 🪈 The S&P 500 is in a triple top pattern, signaling a potential market top and retesting of record valuations.
• 🥳 The market is overvalued based on multiple valuation factors, with the second-highest P/E ratio in history.
• 🫵 Macro timing indicators such as consumer confidence, utility stocks, and yield curve inversions support the view of an impending market downturn.
• 🏦 Central bank liquidity is contracting, opposing the belief that liquidity will keep the market up.
• 😚 Based on historical patterns, the market could be closer to a recession than many expect.

Questions & Answers

Q: How does Kevin Smith determine that the S&P 500 is overvalued?

Smith examines various valuation factors, including price to sales, price to book, EBITDA, and free cash flow. Across all these factors, the market is at or near record high valuations, reaching levels similar to those seen before previous market downturns.

Q: What macro timing indicators does Kevin Smith use to predict a market top?

Smith looks at consumer confidence, utility stocks, and yield curve inversions. He analyzes the divergence between the future expectations and present situation components of consumer confidence, negative correlation between utility stocks and treasury bonds, and the inversion of the shorter end of the US treasury yield curve.

Q: How does Kevin Smith view central bank liquidity and its impact on the market?

Contrary to the bullish narrative, Smith argues that global central bank liquidity has been contracting year over year. He highlights that liquidity drying up is bearish for the market and notes that central bank liquidity increase coincided with the housing bust and the global financial crisis.

Q: What is Kevin Smith's recommended trade based on his bearish outlook?

Smith suggests shorting the SPDR S&P 500 ETF (SPY) at 293, with a target price of 234 over the next six months. He advises setting a stop loss at 310, allowing about 6% to go against the trade if the market breaks out to a new high.

Summary & Key Takeaways

• Kevin Smith, founder and CIO of Crescat Capital, discusses his bearish outlook on the S&P 500, highlighting the market's triple top pattern and overvaluation.

• He argues that multiple valuation factors, including price to sales, price to book, and market cap to GDP, are at record high levels, indicating an expensive market.

• Smith also analyzes macro timing indicators such as consumer confidence, utility stocks, and yield curve inversions to predict a potential market top and recession.