posted on 03 July 2016
by Lance Roberts, Clarity Financial
Ronald Reagan once wrote:
All people want is to be in a place where they can improve their lives. Where their children can have a brighter future than they did. The system in England did not provide that. The revolution was born from economic frustration, oppression, and depression.
240 years later America has descended into much of the same extractive system as Europe. There's a tiny elite showering itself with free money and political favors at the expense of everyone else. Meanwhile, America continues down its path of more debt, more money printing, more regulations, and less freedom. How long can this go on without consequence?
As you celebrate your "4th of July" holiday, it is worth remembering the sacrifices made by those 56 men who signed the declaration of America's birth.
Giving up freedoms in the name of national security, political correctness, and social equality were not the intentions of our founding fathers. Nor should they be yours.
Happy "Independence Day!"
MARKET OUTLOOK PRESENTATION
A copy of last week's Webinar: Summer Market & Investing Outlook
ROUND TRIP TICKET
In this past weekend's commentary, I discussed the likelihood of Central Banker's leaping into action to stabilize the financial markets following the British referendum to leave the E.U. To wit:
Not to be disappointed, Mario Draghi sprung into action on Tuesday suggesting a greater alignment of policies globally to mitigate the spillover risks from ultra-loose monetary measures.
Furthermore, as noted by John Plassard, a senior equity-sales trader in Geneva at Mirabaud Securities via Bloomberg:
Then on Thursday more announcements came from both the Bank of England and ECB:
While many had predicted a market crisis of magnitude stemming from the "Brexit" vote, the reality was a 100-point swing in the markets in just one week. No matter how you bet, you were probably wrong.
So, yes, from "Brexit Fears" to "Brexit MEH" in just one week. Talk about volatility.
STILL DO NOTHING
However, this is why over the last few weeks I have continued to recommend "Doing Nothing" in portfolios.
However, the problem is we remain trapped in limbo. With the markets holding above supports, but still within an overall corrective topping process, there is no reason to become extremely negative on the markets at the moment OR be extremely bullish.
In other words, the only option is to continue to "do nothing" until the market resolves its current state in one direction or another.
The bad news is the longer the market remains in this current state, the risk are rising of a more substantial downside break.
As I have discussed many times previously, the current topping process, stuck below "all-time" highs, is not too dissimilar to what has been seen at previous major bull market peaks.
However, importantly, the long-term bullish trend remains intact. This is why the focus on 1990 as support is so critical. A break of that level would signify the completion of the market topping process and an entry into a full-fledged bear market correction.
Conversely, a breakout above all-time highs would signify a continuation of the current bull-market. While such a breakout is feasible given the reassurance of further Central Bank interventions, it will be increasingly harder to justify higher valuations given the ongoing deterioration in the earnings and economic backdrops.
For now, as has been repeatedly discussed over the past few weeks, the markets remain trapped within the ongoing range of 2040 to 2135.
The vertical dashed lines are "momentum sell signals." Even with the massive surge this past week, there was not enough pickup in price momentum to reverse the current "sell signal." Such suggests, with the markets now back to overbought on a short and intermediate-term basis, there is little buying power available to push stocks substantially higher. The chart below shows the same issue on a weekly basis.
As shown below, while price action has certainly been "exciting" of the last week, which is only getting investors "back to even," volume has been lacking.
All evidence continues to suggest the current rally will likely fail in the short-term. But given the resilience of the markets in the short-term, and the credence given to ongoing Central Bank support, it remains important to not become overly bearish in the short term.
However, given the extremely low risk/reward environment for investors at the moment, it is also not advisable to become overly bullish until the fundamental and economic backdrop improves markedly.
PORTFOLIO ACTIONS (Reprisal)
Given the technical backdrop of the market this week, the rally over the last several days has returned the markets back to upper resistance levels and pushing into overbought territory.
If you have not taken any actions over the last few weeks, this is a good opportunity to clean up and reduce excess risk in portfolios.
Continue with the steps laid out in the "Monday Morning Call" Section a few weeks ago:
Next, as shown in the chart below, tighten up "stop loss" levels and have a strategy to hedge equity risk in portfolios in the event the market breaks down.
Last week, I stated:
Waiting for a confirmation of the break of 2040 proved prescient given the conditions present at that time.
Given the depth of the recent decline, the trading range has been expanded from 2100 to 1990. Therefore, I am adjusting the hedging level to the bottom of the trading range to reduce the potential for a "whipsaw" effect of another short-term "sell-off." Therefore, I am moving the level where a "negative market (short) hedge" is added to portfolio down to 1990 from 2020 last week.
T.I.N.A. IS B.S.
I liked this note from Doug Kass this week:
His point is well made. Stocks DO NOT preserve capital, bonds do. Even if interest rates do reverse for some reason, while bond prices may fall, the corpus is still returned to the investor at maturity along with all interest payments along the way. Such is not the case for equities.
Eventually, even the best house in a bad neighborhood is eventually devalued. Global low to negative interest rates are not a function of financial market strength but rather global economic weakness. There is only one way this ends which is badly.
But for now, the party rages on with little regard for the consequences of partying too long or too loudly. There are always a few who leave the party too early, but the consequences are substantially worse for those who stay too long.
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