Market Commentary for the week of August 15, 2016

Superficial musings
Every year, financial markets take on a "personality" characteristic that make each specific year "unique", different from any other.  The single most impressive feature of this year's data set is how quickly the engines are revving, but how little traction and acceleration it is getting for all that effort.  After one of the worst January commencements in recent memory, the markets have fluctuated between an intense euphoria at every new high, and dire pessimism as the momentum recedes.  In short, there has been something to entertain everyone.

So which is it?  Is this a bull market extraordinaire, or simply more of the same push/pull uncertainty that we have come to accept as normal?

The empirical reality is that we have generated consistent earnings momentum in selected sectors that imply that new highs are likely to continue being part of the discussion.  However, a constant rolling and reverberating turmoil amongst those groups lagging the prevailing trend has been sufficient to bolster the argument for skepticism and lack of fundamental support.  No wonder that professional and amateur investors find plenty about which to disagree.

Without doubt, if you happen to be invested in the right sectors (biotech, cyclicals) you care less about a general consensus regarding the state of the economy at large than whether or not your portfolio is making a ton of money.  In fact, most sectors this year have had considerable follow-through relative to last year.  But most everyone talks only about the "best performing" stocks or groups, to the exclusion of coincidental or laggard performers.  In that regard, this is truly a market for stock pickers, not a global consensus that excites the masses.  For many, they perceive risk as the markets linger near all time highs.

One of those risks generally acknowledged as having considerable influence over economic trends is the price of crude oil.  Even the enthusiasts agree that traditional energy shares are moribund, at best.   Oil prices continue to decline as global supplies increase.  There are few indications that this pattern is likely to abate.  Thus, the stocks and bonds of these formerly great names recede into the background.

It is highly complicated to compress this issue into one phrase or notion, but the implications of the demise of the fossil fuel industry calls into question not only one's view of the energy sector as a whole, but how other conglomerate industries (technology, telecom, healthcare, biotech) will control their growth and supply chains in the future.  The banks seem to be heading towards the same brink as the energy companies, and it shows in the performance of their equity market shares, as well.

Holding on tightly

Overall, our market view remains cautiously optimistic.  It may not feel  like a bull market to everyone, but it is a bull market, nonetheless.  The resounding issue going forward will be how well businesses can sustain upside momentum, product demand, and profitability.  Growth is driven by confidence, which fuels demand.  Despite a scarcity of personal and anecdotal evidence, consumers are selectively spending money and hoping the recovery spreads into their pocketbook.

I am in agreement with those who see the potential for the stock market to stall for a while. Bear in mind that the averages have traced a near-linear 16% rate of return since the depths of its January swoon last quarter, yet only a 3% return since this time one year ago. That's quite a shift in momentum and representative of the "tightening" of amplitude within our trend cycle measurements.  Based upon quantitative probabilities and relative strength measurements, it is more likely than not that the markets could retrace at least 5% of that 4 month uninterrupted linear upside trend line. 

Our focus now will be on locking in profits, and diversifying into low risk parking places temporarily.  In addition, this is a good time to reevaluate goals, and to add longer term demographic themes to one's portfolio, in particular: infrastructure, ecology, biotech, water, food, and non-cyclical companies.

If you get nervous every time the averages make new highs, then we would advise to wait this series out and hope for a correction before committing new capital to the stock market.  There is always a "next time".  But for those who choose to remain invested, the greatest acknowledgement of that confidence is the creation of portfolio wealth. 

In that regard, this year so far has been uniquely interesting and modestly rewarding.