Morgan Stanley's Mike Wilson called the last 2 market sell-offs. He told us the 3 indicators he used to make his predictions — and detailed how he keeps his cool in downturns when others are making…

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Michael Mike Wilson Few strategists have made calls with as much precision as Mike Wilson in 2020.

  • Morgan Stanley’s Chief US Equity Strategist Mike Wilson called the last two market sell-offs. 
  • In an exclusive interview, he told Business Insider the three methods he used to predict the drops, and how he stays calm when the market crashes.
  • Visit Business Insider’s homepage for more stories.

Seemingly few strategists have made calls with as much precision as Mike Wilson in 2020.

The chief US equity strategist at Morgan Stanley was confident in his buy calls in March and April as the market was bottoming. He also correctly called the sell-offs in September and October with remarkable accuracy. 

In spite of his foresight, Wilson admits there’s some luck involved in predicting the future of the market.

“Being a strategist is a little bit of black magic — it’s more of an art than a science. And there’s a lot of things that go into trying to call these corrections,” he told Business Insider in a November 16 phone interview. “Sometimes you get it right, sometimes you get it wrong.”

This year, he’s getting in right. 

To understand how Wilson went about making these calls, we asked him to unpack them. He told us there were three things in particular that led him to forecast the September and October corrections.

3 things Mikes Wilson used to make his sell-off calls

While Wilson said many factors have to line up for him to make such specific correction calls, there were three that stood out to him in these instances.

First were the overextended valuations that had built up since March lows.

“The rally from March was extremely explosive and kind of got ahead of itself,” he said. “And that’s typical — you get a crescendo, capitulation sell-off like in March, and basically the market rebound is a bit of an overshoot. So we just got extended.”

Second, Wilson said that he noticed 10-year Treasury yields were bottoming, meaning investors hunting for yield would soon start stepping out of riskier assets like stocks and into safer assets like bonds if their yields were bound to rise.

“The second thing we noticed in mid-August, interest rates looked like they were bottoming and that was a big driver of the boom initially higher,” he said. “And so we felt like a big part of our call was we felt that interest rates were bottoming, and that happened.”

Finally, Wilson said some of the technical indicators he watches — like DeMark exhaustion signals, negative divergences on momentum trackers like the relative strength index, and trendline resistance at around 3,600 for the S&P 500 — showed the market had little room left to run.

Technical indicators are tools used to track patterns in stock market price action alone, as opposed to looking at macro trends and conducting fundamental analysis of things like company earnings.

“The third thing, which is more the art form, it’s just the technical analysis that we do. We look at a lot of technical indicators and they were all fairly exhausted both those times we called it,” Wilson said. 

He added: “And by the way, I would suggest that right now — we’re not making an explicit 10% call right now — but we’re not as bullish in the short-term because some of those technical indicators are still flashing signs of exhaustion.”

How Wilson keeps his cool during stock market chaos

But Wilson isn’t only good at calling imminent corrections with high precision. He also seems to be able to keep his cool when fear makes the markets appear bottomless.

This past March and April were no exception.

He said keeping his eyes on the numbers allows him to stay calm.

“In March we got to some very attractive valuations objectively, and as an investor, that’s what you want. So obviously when things are cheap, the world is usually a messed up place. And what allows us to keep our cool is we trust those metrics,” Wilson said. 

“We say, ‘Look, this is a very good entry point at a time horizon that’s more than two weeks, I’ve got to step in here.’ And that’s what we did. And sometimes the markets can go against you in the short-term, but if you buy assets at good prices, generally you’re going to end up in a good place if you can stomach it,” he added.

In addition to the steep drops in valuation, Wilson went on to say that his team’s research on when earnings would bottom — April — helped him to know when it was the right time to start buying again.

He said trusting this information allowed him to be ahead of the bullishness that followed during the summer. 

But Wilson also had to give a nod to the role that the years of experience of a senior strategist at one of the world’s biggest investment banks plays in making bold calls.

“This is how markets work. People get more bullish when it’s more obvious that things are OK, but by definition the price is not as attractive,” Wilson said.

“It’s pretty analytical and you just have to trust it,” he continued. “I’ve been doing this long enough.”

A Global Asset Management Seoul Korea Magazine

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