The Eagle

As we ponder this weekend the market implications of all things political, I thought I'd offer up the analogy we've been using during client review meetings. 

With few exceptions, and at times with virtual incredulousness, clients are asking about (commenting on) the record heights the stock market continues to mount. Here, metaphorically, is how we explain it:

Imagine that we've captured a very large beautiful eagle. And imagine that we've affixed it with electrodes that monitor its key vitals: Such as its heart rate, blood pressure, blood oxygen level, etc.; as well as its wing beat patterns and its trajectory as it ascends to -- and descends from -- various altitudes. Now imagine that every Monday morning we gather and put into a model all of this data that inform us as to the present general health of our giant bird.

Sitting here in the present, as we turn on our monitors we of course acknowledge that our eagle has indeed soared its way to altitudes that it hasn't previously experienced, but, frankly, that's not our concern. Again, our concern is its general health and whether, given our findings, we believe it can weather the headwinds and storms 
that it may encounter at virtually any altitude. 

In essence, is our eagle in a good place? Is it strong? Under turbulent conditions would it simply descend to a calmer altitude (say, to a few thousand feet [read Dow points] below) where it would glide around until the winds subside, then resume its previous pattern and ascend to yet greater heights? Or is it exhibiting a level of stress that would have it collapsing in the face of an unexpected storm; tumbling to substantially lower altitudes where it would require an extended period of recuperation to build back the strength, stamina and confidence necessary to at first retest the previously failed altitude, then potentially breaking above and reaching for yet higher highs? 

In the latter instance we'd need to determine what steps to take (what reinforcements we might deploy) to mitigate the potential damage that a rapid fall from such an altitude might levy upon our eagle; recognizing that any protective measure(s) would likely limit its ability to push to yet greater heights should the signals recorded by our system turn out to be false.

Of course, in paragraphs 1, 2 and 3 our eagle symbolizes general economic conditions and the equity market. In paragraph 4 it represents our clients' portfolios.

Regular readers and clients know that we've developed a rigorous and robust system for tracking both the technical and fundamental factors that we believe are crucial to assessing the present state of the markets. In the past, on the fundamental side, we simply assigned a value to each data point to determine a net macro score, and then calculated the percentages of positive, negative and neutral indicators. 

This year we've taken our process a step further: Now we score our findings like an index (with possible scores ranging from -100 to +100); which provides a better, more consistent scoring method for back-testing -- as some of today's data weren't available, say, back in the mid-90s. 

Here's a 32-year graph of the S&P 500 Stock Index that essentially puts our analysis into perspective. Note: price was removed. The lines you see -- which we're using here for illustration purposes only (i.e., not factors in our formal technical analysis) -- are its 10, 20, 30, 40 and 50-week moving averages:  

click to enlarge...


As the graph illustrates, at the two previous bull market peaks the back-tested PWA Index was very much in the red. While in the midst of the past three corrections (the most recent dip reflects back-to-back double-digit corrections occurring in 2015 and early 2016) our index remained in the green. I.e., during what turned out to be corrections (volatility/turbulence to ignore) the eagle was exhibiting a level of internal strength that simply had it briefly (relatively speaking) descending a few thousand feet, allowing the storms to pass overhead before it attempted yet greater heights. 

While of course, and we emphasize, in markets there are no guarantees, last Monday's PWA Index came in at an exceptionally strong overall score of +81.33; with our Economic, our Financial Stress and our Financial Market subindexes scoring +88.37, +100 and +57.14 respectively. Thus, here we are, at all time highs no less, with probabilities suggesting that this bull market has a ways to run -- or fly, if you will.

Please keep in mind, however, that -- by healthy necessity -- even the strongest of bull markets tend to endure multiple corrections before they're through.

For a deeper dive into our assessment of present conditions the world over, here's the link to our 2017 Year-End Client Letter...