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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.