Flexibility: An Ally In Markets

We recently outlined numerous concerns about the sustainability of the current bull market in stocks. Experience tells us that thinking we know what the future looks like is a big mistake. If you are skeptical about the previous statement, look at the track record for economic and market forecasts; it is not good. Therefore, under our approach we allocate our portfolios based on facts.

Since market profiles can improve when new facts come to light (see March 2009), it is important for us to keep an open mind about all future outcomes (bullish and bearish).

Markets Are Always Dealing With Good And Bad News

Markets and charts always reflect the net balance between good news and bad news. Bear markets start when the net balance shifts to the bad side of the ledger. The previous statements can be applied to any year with any mix of good and bad news.

Historical “Open Mind” Case

Given the 2016 market profile is concerning, it is logical to ask:

Have stocks ever rallied from a similar good news vs. bad news profile?

The answer is yes, in 1994-1995. Before you say, but today is different, keep in mind the market was dealing with good and bad news in 1994, just as it is today. The charts in 1994 reflected the net interpretation of all the good news and all the bad news.

Trends Reflect The Net Aggregate Opinion

One way to keep an eye on the market’s net interpretation is to look at market trends. When trends are bullish, it tells us the net interpretation is positive relative to future expectations. When trends are bearish, it tells us the net interpretation is indicative of concerns about future outcomes. The two weekly charts below show trends (the net interpretation of all fundamental data) in late 1994 are similar to trends in early 2016. There is nothing magical about the 25, 50, or 100-week moving average; we could have used the 50-day and 200-day or any number of technical methods.