Wednesday, November 15, 2017

This Week's Message: The Quintessential

The stock market is a fascinating phenomenon! It is the quintessential independent, and unpredictable, entity. Yet there are those who would have us believe that they have its number; that they have indeed figured out what makes it tick and what its next move is going to be. 

They are the folks our clients quote during review meetings: "I read where so-and-so said the market's on the verge of collapse." "So-and-so says the bull market has 5 more years to run." "So-and-so says the market will be stuck in a trading range till the end of the year, then take a 10% hit in January." Hmm....

Okay, so yours truly keeps a journal (not for public consumption!), and in that journal I jot down where I believe probabilities lie in the near-term (along with the more important, and actionable, long-term) based on my observations, instincts and impulses honed over the past 33 years of doing what I do. Honestly, when I journal, at that moment, I really think I know what I'm journaling about. Ah, but if I had to put my finger on the quintessential (I like that word today) quality of the successful investor/adviser, I'd say it's humility! In other words, if I had a dime for every time I missed the near-term mark, well, you know...

Back to those would-be knowers I referred to above; trust me, they don't! For, if they did, they wouldn't advertise it to the world, unless of course they've already taken their full positions (long or short) and think they can self-fulfill their own prophecy. Thing is, if they really knew, there'd be no advertising needed; the market would simply take care of the details. Which means they're likely up to something else, on behalf of their ego, or their pocketbook via getting lucky with their guess and grabbing a few big-monied clients in the process, or selling a ton of subscriptions to their soothsaying service, or perhaps getting their book on the bestseller list. In any event, they're not smart investors. You'll only know what the smart investors are doing weeks/months after the fact when their required quarterly 13-F filings (tells of their exploits during the prior quarter) are published; if it were up to them, you'd never know what they're up to. 

Bottom line, never listen to the so-and-sos!

Now, while I will forever implore you to shut your ears to the prognosticators, thing is -- and contrary to what I just wrote -- they're always right! I mean, the doom and gloomers are absolutely correct, there is indeed a bear market coming. And the forever bulls are absolutely correct as well, the market will ultimately find its way higher. Question being, when?? And, question being, what does the present setup suggest in terms of the most likely scenario going forward -- from right here??

Now there's where we sink our teeth in! Each week, as you by now know, we run through an exhaustive technical and fundamental exercise. We've even developed a scoring system (which now -- for proprietary reasons -- means we'll be less generous in our illustrations here on the blog) that we've applied to all of our back tests as well. And, suffice it to say, for the moment, the bulls own the probabilities going forward. 

Technically speaking, while certain indicators are showing some near-term weakness, the longer-term trend (the one we're concerned with) remains very much in bull mode. As for the fundamental backdrop, this week's score is just off of its all time high. 

That said, please, make no mistake, positive setups are forever rife with negative setbacks. It's called volatility; remember volatility? 

This year, while quite positive for stocks, is, in our view, shaping up to be quite dangerous. Not because we're at all time highs, and not because valuations are stretched, and not because we're experiencing the second longest bull run in history; but because we just broke the record for the longest stretch without a 3% pullback! 

So, why is a lack of any notable pullback dangerous? Well, now that you ask, I guess it's not, not actually. That is, not if you (the reader, our client) don't freak out when the inevitable occurs; the inevitable being that long-overdue pullback. 

You see, as we sit here today -- based on the weight of the evidence (the technical and fundamental setups) -- downward volatility would be volatility to ignore. And, alas, the mistakes we've witnessed over the years generally have to do with folks taking too seriously that which is the normalcy of markets; i.e., they go down in the short-run, even when the long-run looks pretty good.

Now, in closing, I promise you, the setup will change. The data that look solid and optimistic as I type will, over time, evolve into something far less optimistic. At which time we'll be singing a different tune here on the blog, and weighting portfolios to different targets within their sector allocations. For the moment, however, our analysis says stay the course.

We'll keep you posted...

Have a nice weekend!

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