One of the most hotly
contested debates within the financial markets is whether data “supports or refutes” current actions of
stock and bond performance. One of my
colleagues strongly suggests that the disconnect between equity direction and
news releases is nearly correlated.
While I agree that there is a high inverse
correlation between daily stock prices and long-term fundamentals, I am not
yet willing to throw in the towel about equity ownership.
In fact, with bond yields as
low as they are, there is seemingly no other choice but stocks with which to
ride out this storm.
In addition, there are
significantly more options to own than just classical “blue chips.” Uptrend cycles in agriculture, basic
materials, utilities and technology are forming in my long-term analytics, even
though the short-term is sympathetically volatile with current statistics. In other words, depending upon one’s aperture
or perspective, the long term prospects for industrial development,
technological innovation, and infrastructure looks much rosier than what
knee-jerk traders would have you believe.
I hasten to caution that short-term cycles, whose
performance since July has been impressive, are near expiration and likely to
turn down in the near term.
As always, these issues
translate into one’s time horizon and tolerance for risk. Versus the broader global averages, it is
quite possible to isolate situations and sectors whose upside probabilities are
more optimistic. The only hurdle to this
exercise is to remain confident in one’s discipline and not to get dissuaded by
“exogenous noise.” Usually, the more
obstacles placed in your way, the more difficult it is to find good
investments, but the more likely it might be to reap positive rewards. My philosophy of prudent asset and sector
allocation has been important to my clients during this navigation.
Forecast.
When comparing groups to the
rest of the market, I prefer to look for earnings acceleration patterns and
relative strength indices whose values give me a higher probability of
outperformance against a general benchmark.
I am noticing a gradual shift
(despite non-confirmation from public data) into tangible assets, inflation
plays, and yield oriented securities in my RSI components, and a decidedly
anti-consumer bias in those rankings.
Although the past two months
have been heroic, the achievements are less-than substantial. The most we have gotten from those indices is
“new annual highs,” while valuations remain at least 15-30% below previous
all-time highs, a mighty struggle to maintain relevance, at best.
The next short cycle direction
is likely to be down and likely to
break all the support bases built during the summer. Signs are building that my colleague might
get what he wishes for, a full-bore, year-end confluence of negative global
economic statistics along with a market bear.
Overall, investors are looking
for confirmation of the direction of their choice, higher or lower. It is, in fact, this uncertainty about such
confirmation that keeps any rallies from emerging strongly, and holds at bay
any commitment to deploy cash into financial securities.
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