It strikes me as odd, and slightly disturbing, that a one day rally on Wall Street, particularly seemed to be caused by a news-worthy event in Europe, can effect a total change in psychology and newspaper headlines. This manic upside/downside emotional swing is neither healthy nor representative of the facts. Simply by saying we’ve turned a corner doesn’t make it so, or ease instantaneously the underlying causes of the recession.
The nuance between exact science and interpretation is a fine-line, but not to be discounted too easily.
Besides, investors don’t expect the markets to turn on a dime,
even though they might hope for such.
Increasing levels of debt, and
depleting savings rates, are part of our economic landscape. Both foreign and domestic banks have smaller
resources, larger exposure to potential risk/default, and are loathe to lend
money indiscriminately. This is not a
happy time to be a purchaser or a lender. The sheer magnitude of the financial
crisis, factually and emotionally, cannot be diminished by one day’s collective
sigh of relief.
Therefore, I worry that a complacency might extend to
the financial community that could accelerate a kind of manic “gunslinging” in
the markets reminiscent of times when only the speculators made money. We need to
return to value-based, and values-based,
fundamental analysis before committing our capital once again to rally
attempts.
Unfortunately, I don’t think
the time is yet at hand.
Sustainable metrics.
We are, however, dealing with
a “new normal.” As I have previously
written, trading cycles have contracted.
Here is where a quantitative discipline might aid the average investor. Instead
of guessing what might work, one can use the rhythm and pulse of market cycles
to amplify potential capital gains expansion (in sectors and securities) and
minimize the impact of negative trends or expectations upon the portfolio as a
whole. By combining the interaction
of price and relative strength quotients, one can maximize the existing amplitude
of cycle measures by buying, or selling, at appropriate and measurable
inflection points.
The collapse of the global
credit markets didn’t occur on one date-specific in October 2008. No, the seeds had to have been sown over
decades prior, culminating in a seminal period from which we are still
evolving. Within that context, a global financial and economic recovery might be occurring, but the decisions
needed to create that recovery must be made not simply by default, but by
active participation. What we saw last
week from the EU was a start, but not sufficient to turn a bear psychology, and
a bear market, into a celebration of bull market renaissance.
My trendlines and sector-strength distribution analysis
indicates that, despite the inter-day advances most recently seen, the market
is consolidating laterally around secular resistance levels initiated in 2006,
and which persist mightily today in restricting intermediate and short-term
attempts to justify upwards movement otherwise. However, given the
time of year, I would expect portfolios and portfolio managers to try to
maximize upside opportunities within short cycle advances, having the effect of
elongating short sine waves, making them appear more robust than underlying
fundamentals should indicate.
Either way, caution at
oversold tops is always more prudent than chasing a trend once it has maximized
valuation.
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