The vibe is changing. It’s been a great rally but I can see (on the charts) and hear (in the media headlines) the herd stopping to think about what’s next and it’s probably not great. As Henry put it, we always come out of Easter fat and happy, then it all goes wrong. What is spooking Henry perhaps is his innate understanding of this chart which is the seasonal chart of the All Ords since 1988 not including this year. As you can see the market usually peaks at Easter and drifts until late June. Specifically, the chart peaks on April 26 – and bottoms on June 27. Whilst I abhor the use of past statistics as a prediction for the future and I would never sell a thing on this sort of weak voodoo alone, it is mildly interesting - we are running into the gloomy zone of the stock market’s calendar year. This morning we have done a bit of cashing up. Not a lot, just some profit taking on recent highly profitable positions. The logic:

• We want to run up 15-20% cash so we outperform if the market tips over again and have some cash to deploy when it does.
• We are a fund manager judged on relative performance, so for us holding 20% cash means we outperform a falling market.
• The ‘pause’ we detect not a significant pivot point as it was at the top and the bottom - this is a slowdown in a high velocity recovery rally.

How you interpret this for your own funds is for you to decide. , investors in quality long duration stocks can ignore our momentary hesitation. Traders in hot stocks might interpret it as “Take profits and come back another day”. Reasons to get a bit more cautious:

• The herd is sobering up. You can hear it in the headlines. The bulls are tiring.
• The rally has been a sentiment recovery – that only lasts so long.
• The one metric that turned the herd was those exponential curves flattening. This flattening is now ‘in the market’. Discounted.
• To follow through the rally needs to be supported by "value" as well. Value is currently unknown. Earnings are in flux. There is no reliable foundation to the market yet.
• The economic headlines are going to deteriorate significantly from here. Jobs numbers, consumer spending, retail sales, GDP, they are all crashing. We just haven’t heard the numbers yet. They are coming. In fact they are here...this is from our Overnight US Market commentary this morning:

US retail sales posted a record decline in March. March Industrial production fell the most since 1946. NY Fed manufacturing hit a record low in April, while homebuilder sentiment fell to the lowest level in seven years. The Fed's April Beige Book said economic activity contracted sharply and abruptly. Big provisions for credit losses were the takeaway from bank earnings.

• The next few weeks are going to be littered with company announcements as they (try to) quantify the damage for us. That’s unlikely to be pretty.
• Charts – Some market and stock charts are topping out for the first time since the bottom.
• Notably Australian market charts are OK for the moment, no sell signals but we may not be in the lead any more. Some of the European markets fell hard overnight. Italy down 4.78%. Germany down 3.90%. We were beginning to get back to normal, this is not ‘normal’ - the herd is turning in Europe.
• VIX volatility index up 8% overnight. First jump in a while. Not significant yet, but watch it.

All of this is enough for us to just take the top off things short term. Note: I reject the lazy comparisons you will read suggesting this correction will follow the same profile as the GFC which took 17 months from beginning to end - implying we are in a bear market for 17 months. This is utter rubbish. Every major correction is different. We will have our own profile.    THE BIG QUESTION The big question now is whether there is fundamental value here. Earnings numbers are highly uncertain (unknown) at the moment. You can’t assess value.  We’re happy to take a breather whilst the market works that out. Despite today’s commentary, I am still sure that when we look back on 2020 we will see it as a once in a decade buying opportunity. Look at this chart for goodness sake. So don’t stress, we are trying to finesse the short term ups and downs. As the IMF said yesterday, global GDP will drop 3% in 2020….the horror…but it will bounce 5.8% in 2021. Let’s see if we can exploit or insure ourselves against the herd worrying about the 3%...before the 5.8% comes into focus. CHEAP OR EXPENSIVE Is the market cheap or expensive? JP Morgan have had a crack at working out whether the market is cheap or not - they say the ASX 200 PE is 16.1x having hit a low of 12.4x at the lows last month. In the GFC it got to 9.1x. Not terribly encouraging although expecting the market to drop to the GFC PE would require a significant financial crsis - we simply do not have that level of concern yet. This is a chart of the All Ordinaries and S&P 500 PEs from Datastream (different providers have different numbers). We are clearly "cheaper" and historically "cheap"...but whether the earnings numbers are right yet is another question. If earnings are significantly downgraded from here the PEs are higher than they look and we won't know until results come around whether earnings forecasts are correct - at the moment we don't know that. But we may never really know - what this chart does tell me however is that this is going to be a great price to buy the market long term. We just need to decide whether that is today and the answer to that is that no-one knows.