posted on 14 August 2016
From last week:
I know. Boring.
It has now been FIVE weeks since the market broke out of its 18-month consolidation process at which time I laid out the case to increase equity exposure in portfolios. I have been repeating that case here each week, primarily for new readers, with not opportunity to adjust exposures as of yet.
That is a fair question.
Managing money is about managing the risk of loss. Notice that I did not say "creating returns."
If I manage portfolios against the potential of long-term impairment of capital, the creation of returns becomes a byproduct of that effort.
Currently, while there is a very bearish case to be made from the deterioration of economic and fundamental variables relative to the market, the current technical price dynamics are both bullish and positively trending. Therefore, as a money manager, I want to maintain exposure to the equity markets until such time as the technical price dynamics change from bullish to bearish.
I have stated repeatedly over the last couple of weeks that the breakout of the market above the 18-month consolidation range was bullish and demands an increase in equity exposure. However, such an increase must be done when the risk-to-reward ratio is favorable which is what I am currently patiently waiting for. I have laid out the potential price corrections needed to both warrant, and negate, such an equity exposure increase.
As Doug Kass noted this past week, there is a trio of factors pushing stocks higher.
The "big chart" of technical underpinnings clearly suggest that while prices are bullish, the underlying "health" of the market remains weak.
What Can Go Wrong? A Lot!
Unfortunately, several factors could cause an unceremonious change in the market's direction at any moment. As Doug notes:
The Bottom Line
I agree with Doug. The view of "TTID" or "TINA" will likely end very badly for investors over the longer-term time frame. Distortions of price from reality are short-term, emotionally driven, cycles.
However, in the short-term, we must recognize the potential for the markets to remain "irrational" longer than logic would currently dictate. This is why I am cautiously managing portfolio risk and allowing the markets to "tell me" what to do rather than guessing at it.
What happens over the next few days to weeks is really anyone's guess. The data continues to suggest some sort of corrective action over the next two months (as discussed previously) which will provide a better risk/reward setup for increasing equity exposure in the short-term.
But, over the longer-term time horizon, I am unashamedly bearish as the current detachment between prices and fundamental reality can not last forever.
Eventually, something's gotta give.
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