So a couple of 200-plus point declines and everyone’s now thinking the hammer is about to drop. Another validation of my point last week that negative thinking begets negative consequences. But, interestingly, my admonition is the same in most cases: “we’re not as bad off on the way down, nor as good as we think we are on the way up.” This cyclical decline was anticipated by me, particularly in light of the recent sustained upswing in equity prices.
The kind of “raw nerve” sensitivity
we are feeling obviously underscores an inherent fear we have about the
validity of the numbers that have been ascribed to the current bull cycle. While anecdotal personal evidence might seem
otherwise, market-makers use these data to support better correlations than the
data might otherwise constitute.
Thus, based upon hyperbole,
fact, or something else, we have periods of benign activity followed by
overreaction or panic.
One might conclude that
apathy is preferable to mania, but I would argue that we need a sustained
period of optimistic diversity to redirect our current woes.
Higher probabilities always
rise at the margins, so any distortions we experience right now could leave
pause that we are, in fact, close to a turnaround to the upside. Following a summer of inordinate, and unnecessary,
exuberance, breadth is widening, inclusive of more sectors with possibilities
of earnings growth and share price expansion.
Sector diversification is a precursor to market performance. The market’s primary concern is whether
earnings growth rates can be sustained for long duration.
Sectors which are currently
broadening their bullish potential include Consumer Non-Cyclicals, Industrials,
Basic Materials and Utilities. This is
relevant because many of these companies lay dormant and depend upon consumer
sentiment as the engine of top-line revenue.
Philosophy matters.
Obviously, too, we need to
define our timeline of expectations. The
figures we use for a turnaround take months/years to evolve, consistent with
traditional cyclic-phase analysis. Intraday
calculations are mostly irrelevant, and logical only to traders and
speculators. If we can demonstrate a
solid cycle, or grouping of cycles, in which earnings patterns expand, we have
the basis for further optimism.
Market quantifiers are only as
good as the data that go into them.
Further, they must be consistent across the board, allowing for no
deviations amongst geography, capitalization, sector, or market. In today’s case, more equities are moving
from “neutral” to “buy” across the whole spectrum. Although not yet reflected in anecdotal,
or even intraday, activity, we seldom know where the bottoms or tops really
are. We must rely upon the preponderance
of the evidence, and the trend in which that evidence lies. In fact, it is only in hindsight that we
can identify the inflection points from which a new secular trend has begun.
Generally, there is little correlation
at the beginning of major market swings between behavior and attitudes. While I’m not emboldened by the huge point-and-percentage
declines we just experienced, the quantifiers have definitely changed the
quotient of expectations to the good.
Would you rather be at the
bottom of an abyss looking up, or at the top with nowhere to go but down?
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