Because so many things are subject to interpretation and subjective analysis, it is comforting to stumble across some data which might inexorably lead to only one conclusion, like gravity for example.
Objective quantitative data
derived from current market studies indicates a kind of bullish extreme, which
in year’s past has produced a similar corroborative negative response. Whether
we differ on which/what events might initiate a negative response, let us agree
at a minimum that it was highly more probable, and beneficial, to put cash to
work in 2009 at the bottom of the market than it is to do so today. As market valuations bunch up at the top, many
stocks have seen their likely near-term peaks.
Because hindsight is always
20/20, might we one day look back at today’s price peaks and wonder if we
missed a near-certitude that corrections always imply? Once the selling starts, it’s too late to
pick and choose, or leave the mania open for subjective review.
This is not meant to say that
the bull is over or that I no longer favor equities. Instead, it is an assertion derived from math
modeling and statistics that the odds were greater in our favor for capital
gains before the bull run began than
as it nears a statistical peak. Rather, I believe it is likely to see some
sort of short term cyclical capitulation in global markets which then
recalibrates the odds back in our favor.
With 3 aces already on the table, the probability of drawing another
from an already stacked deck diminishes significantly. I favor equities in the long term, but I am
reticent to go all in at the top.
In favor.
Of course, one’s
interpretation depends upon your cash reserves and your investment
timeline. There is always something to
buy, but the selection becomes depleted as many equities run ahead to new
highs. In fact, as the menu diminishes, many investors become too aggressive, trying to make that one
final gambit.
As markets extend near term, I
try to rely upon profit-taking and asset rebalancing to mitigate any potential
drawdown to portfolios. When probability
integers move more in my favor, I typically deploy cash into opportunity. Right
now, the stochastic integers (relative strength) have not moved off of a danger
signal, so I remain cautious.
Markets are fluid. As I said earlier, there is always something
to buy. The intermediate advance (5
years) has raised the valuation of many equities and sectors, most notably the
Industrials, Cyclicals, and Technology.
If there are any sectors lagging the trend, it might be Basic Materials
and Energy. The case can always be made
to “go long”, but few advisors will warn you when risk outweighs opportunity.
Some might conclude from the
preceding paragraphs that portfolio managers operate under a “restrained schizophrenia”, go long,
sell, buy? Well, when one employs a
successful discipline, one is always as positive as one might be about the
outcome, but realistically cautious about negative consequences. Kind of like playing golf…see the target,
avoid the obstacles.
A clear cut signal to be
cautious is when everybody else gets exuberantly positive, as we’re modestly
seeing now.
Respectfully, I just don’t
think its time to follow the trend, short-term, and place all my markers on
black. Study the statistics as we near
the end of the year, and muster as much patience for the longer view as you
can.
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