Market Commentary for the week of March 13, 2017

Keeping score
Now that the US stock market has finally "released a little steam" last week, investors suddenly feel a little nervous about perpetual upside linearity of equity performance like the kind we've seen during the past three months.  In fact, the "check engine light" just illuminated on the dashboard and it might indeed be time to pull over for a check-up.

While the modest pause in stock price accretion may not be a surefire indication that there is something "wrong", or that justification for the rally has abated, it does, in my opinion, offer a perspective about dashing blindly through any warning signs out of sheer ignorance or habit.  As I have consistently written over the past few weeks, nothing moves perpetually on a straight line incline without pause or resistance.

There are any number of reasons to pay heed to the market's modest respite, not the least of which is to reboot what is "normal" about stock price performance versus what is excessive.  While on autopilot it is always easy to ignore the potential for meeting obstacles....until you unintentionally hit one!!

Varying degrees of excessiveness are easy to quantify, yet particularly dangerous when they exceed "nominal" range.  I will readily admit that it is difficult to call for retreat, or to wimp out during a prolific bull advance, I will always raise caution flags when relative strength integers (RSI) expand beyond nominal capacity.  Quite simply, these quantitative tools help us to know the probability range of expectations.  Therefore, it would be counter-intuitive to bank upon improbable duration persisting indefinitely.  As a portfolio manager, this means "do no harm" as well as "take every opportunity to lock in gains" and prepare to do battle again without undue sacrifices.

Flashing yellow

We often see amateur investors getting caught up by momentum and false expectations.  Sometimes these unrealistic objectives cause them to miss out on banking the bounty at hand in favor of playing the game until exhaustion, or catastrophe, occurs.  Of course, undeterred by the potential of failure, they seek only the "big score" without regard for any consequences.

My professional advice about risk, culled from nearly 4 decades of experience is:

Quantitative tools are instruments that help evaluate the direction, magnitude and duration of cycle trends.
Risk measurements such as Relative Strength Integers (RSI) might offer predictive indicators correlated to an investor's time horizon.
Excessive linearity, up or down, is a "signal" preceding trend expiration.
Profits are a successful benchmark, against which losses should be minimal.

As with anything in life, there are few absolutes or dogma.  But by applying scientific method to traditional "fundamental analysis" one can gain significant perspective to otherwise non-quantifiable data.

It is always useful to have constructive debate, and to disagree "agreeably" about points of view, but in the end the only real measures of portfolio effectiveness are methodology and track record of outcomes.

When I see a speed-bump, I slow down.

Market Commentary for the week of March 6, 2017

Slow leak
It takes time for a bicycle tire to lose its air.  And oftentimes financial markets exhibit the same type of slow leak before investors realize that the steam has come out of the rally.  (For edification purposes, we note that panic sells  also can occur, swiftly and without warning).  My review of the current stochastic condition for the global equity bourses (relative strength integers) has been unyielding in stating that while the underlying economic fundamental data has been improving since the end of the Great Recession of 2009, the financial markets have been far outpacing the rate of underlying economic growth, and extending into untenable linearity for the past 4 months.

Usually, it's only after  a capitulation happens that investors concede the real danger they put themselves into, but by then it can be too late.  We are not suggesting that clients sell everything and abandon the investment markets altogether.  That implies market-timing, and I would suggest that no one is prescient enough to know how to do that effectively.  Besides, buying and selling into and out-of rallies is time consuming and likely not to yield the desired result every time.

However, we are suggesting that as equity and bond performance point toward a "reversion to the mean"; and as the Fed continues to provide us acknowledgement of economic sustainability accompanied by the prospect of higher interest rates; as well as a the recent buying indicating a more defensive allocation in Utilities and Basic Materials, this would be a good time to park ones' gains and observe a less passionate posture about capital gains in the near-term.

There are a number of catalysts which might precipitate a distribution at the top  (unseen selling that occurs prior to a markdown event).  Most notably, the political rhetoric, social unrest, and heightened jingoism coming from world capitals like Washington DC, Paris, and London.  Persistent bull markets typically thrive in periods of modulation, security, and lack of rancor.....all qualities that are missing from the current political climate.  While our nation waits to see the details of the economic blueprint laid out by the President before Congress last week, the world also sits on pins and needles trying to assimilate the divergence between nationalism  and globalism  in world discourse. 

It is far more likely that we have seen the best quarterly performance for 2017 already, meaning that the balance of the year will be spent reallocating towards defensive sectors and raising cash in order to hold on to gains already won.

Critical inflection?

Long periods of linearity (up or down) are antithetical to quantitative laws and are usually harbingers of a trend reversal  more so than a trend perpetuation.  It has been over a year since the last significant stock market "correction", and although the calendar alone does not dictate the length or magnitude of a trend's duration, the RSI (relative strength indicator) data does.  Right now, these data are disadvantaging the likelihood of a cyclical advance.  Note that these indicators are helpful as an adjunct to traditional fundamental analysis, as well.  The fundamentals, as mentioned above, are improving, but not on a parallel scale that would support a straight-line run-up in stock prices indefinitely.

This year is likely to be a year in which politics and economics digress until the policies, attitudes and outcomes start to match up.  While it is always difficult to buck the trend and sheepishly call for a retreat, we think it prudent to take advantage of our investment success thus far, bank some gains, and start to concede to the slow leak in the tire.

Having once coined the phrase "parallel disconnect"  to refer to the divergence between two fundamental data seemingly moving in concert...but not correlated in reality...I cannot think of a time when the definition of the term was more succinct.  While economic progress is indeed solid, we would not be surprised if the exuberant popularity of stocks were to take a small hiatus and render a "cooling off period" where the opportunities and risks might be reassessed in an atmosphere more receptive to reasonable evaluation of the data.