posted on 25 April 2016
by Lance Roberts, Clarity Financial
A BIT OF HISTORY
Earlier this week, the market broke above 2080 on the S&P 500 pushing a breakout above the downtrend line that began last May. That breakout required a slight increase in equity risk allocations.
Not surprisingly, I got a tremendous amount of push back this past week from individuals with comments like:
I can certainly understand that sentiment. It would certainly seem that way since I have been extremely risk adverse since last May.
Let's recap the last couple of week's of commentary to provide some basis for my "bullish metamorphosis." [Sarcasm Alert]
WHERE AM I NOW
Let me assure you, I am not a raging "bull" by any stretch of the imagination. The fundamentals simply don't support prices at current levels particularly as economic and earnings data continue to weaken.
Furthermore, let's keep my recent actions in perspective. Here was my allocation model previously:
With 35% weighted in bonds and 35% in cash - I am still very conservatively invested.
If I am wrong, and the market plunges by 10% from current levels, the portfolio would be down less than 1.5% from current levels.
However, if the markets continue to build on the bullish momentum and trigger additional "buy" signals, I can continue to scale in more safely as "confirmation" of a return to the longer-term bullish trend is given.
As shown in the chart below, such a confirmation would currently require:
Importantly, as noted, my stop-losses are currently set at 2000. If I am stopped out of my recent equity risk additions, portfolios will suffer roughly a 3.8% loss in each position. On a weighted basis, each position will contribute a loss of 0.19% each.
I can live with that risk considering that portfolios are still well protected following the declines and turmoil from May of last year.
Shut up! You didn't either. In reality, the majority of investors are now "giving thanks" for getting back to even. It is a hollow victory at best. Furthermore, these same individuals didn't buy the previous low, or the low before that either.
Hindsight is 20/20, and generally speaking, anyone who runs around proclaiming they were prescient enough to buy the previous lows is probably lying or got lucky on a "guess." But these are the same individuals you will never hear from again following the realization that "permanent market advances" are not a real thing.
However, from a disciplined investment management process, it was only last week there was sufficient evidence the previous low was indeed a short-term bottom. In fact, with the trend clearly negative, lower highs and lower lows, the correction was in the beginning stages of a full-fledged "bear market" decline. It was only massive Central Bank interventions that stemmed that correction.
Since I manage other people's retirement and life savings, I am not afforded the luxury of "guessing" at entry points.
I have been managing money, in one form or fashion, for nearly 30-years and have seen investors come and go...but mostly go. This is due simply to the lack of an investment discipline, and emotionally driven mistakes, which eventually shift their money to the hands of those with disciplined, pragmatic and conservative approaches. For my client's sake, this is the side I choose to be on.
You don't have to like it. You don't have to follow it. It is just my approach. Take it or leave it.
But there is one point to be made for my approach - I am still here.
HOPE RUNS HIGH
First, let's remember that the current advance is not built on improving economic or fundamental data. It is built simply on "hope."
I am sure I forgot a few things, but you get the point. With valuations expensive, markets overbought, volatility low, and sentiment pushing back into more extreme territory, there are a lot of things that can go wrong.
While the late week correction has been mild, it has succeeded in working off some of the very short-term overbought condition. Concurrently, the number of stocks trading above their 200-dma has surged along with bullish sentiment.
As shown below, the recent surge in asset prices has also turned the 50-dma sharply higher and is in the position of crossing back above the 200-dma. It is worth noting that the last time this occurred, it did fail shortly thereafter.
I can't really explain the current rally. All I know is that prices are dictating policy at the moment. We can deny it. We can rail against it. We can call it a conspiracy.
But in the "other" famous words of Bill Clinton: "What is...is."
The markets are currently betting the economy will begin to accelerate later this year. The "hope" that Central Bank actions will indeed spark inflationary pressures and economic growth is a tall order to fill considering it hasn't worked anywhere previously. If Central Banks are indeed able to keep asset prices inflated long enough for the fundamentals to catch up with the "fantasy" - it will be a first in recorded human history.
My logic suggests that sooner rather than later somebody will yell "fire" in this very crowded theater. When that will be is anyone's guess.
In other words, this is all probably a "trap."
But then again, "hope does spring eternal."
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