Almost midway through this
calendar year and investors are still asking, “Which way is the market going?”
Believe me, that’s one long unanswerable question.
What we do know, empirically,
is that the global credit markets are poor; pricing in most stocks is
inefficient and governed by short term trading and speculation; sustainable
economic growth is non-existent; and inflation is rampant in consumer goods and
raw materials.
Even if we’re correct with our
asset allocation, we are playing defense and hoping to minimize any downside
damage.
Of course predicting the markets is not my specialty, I simply observe and
calibrate the variances. But if
hindsight and backtesting are any indication, I would posit that the current equity market continuum is
poised for more downside potential than upside, and that any inefficiencies
between price (valuation) and earnings is likely to yield precipitous downward
events such as the one we had last Wednesday.
The greatest risk is
accelerating for traditional “buy and hold” investors, because most of their
gains are likely to be mitigated by over-extensions from the last cycle
rally. On the basis of relative strength metrics, the majority of equities
worldwide are entering into capitulation phases. It is more likely, then, that we might see subtractions from current portfolio
gains than additions.
Find the trend.
The world always looks for
additive statistics which might create synchronicity between expectations,
fundamentals and valuations.
Unfortunately, as I review my data, there is a lack of correlation
amongst those factors, making for disjointed performance, poor fundamentals,
and declining enthusiasm. Indeed,
relative strength quotients are indicating another shakeout in equity
valuations whose shape might be an immediate downside capitulation or, worse, a
protracted lateral basing. The lurching
and turning of the equity landscape (and our stomachs) is something we should
get used to for the foreseeable future.
Some see these configurations
as disruptive. I see them as midpoints
in a cycle measure that is now closer to expiring than it was at its origins
five years ago. In other words, if a
bear market is a cycle unto itself, as opposed to a destination, then that
cycle has begun, we are in it, and at some point it too will expire and reverse
back upwards into a new secular bull.
How long that might be is deciphered by the science, but certainly not
exact and certainly not defined by a point in time, but rather by an inflection
that takes time to unfold. The hallmark of good quantitative
methodology is that it can measure the cycle we’re in, but not predict the
outcome or timing of the origin of any but the current phase.
Going up.
In the wake of this
dis-equilibrium we have to adjust for a new framework of evaluating risk, financial
reward, and investment expectations.
Altruistic investing is gone for now.
Macro scenarios are left to the “talking heads.” Today’s market is characterized by “stock du
jour” securities trading.
To me, that only heightens my
suspicion about the validity of fundamental integers, and broadens my asset
allocation window from one cycle to several; from micro, bottoms-up to leading
cycle measures; and from what looks “sexy” today to what might endure in spite
of any valuation obstacles.
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