Over the past month, the global market advance that began back in September of last year has showed increased evidence of fatigue. The upward momentum in equities, real estate, commodities and even in fixed income, while still present, is clearly deteriorating. Click here to access our current view of the markets – our five-year ETF charts with their respective short- and long-term optimal trend-lines. With a tentative deal among Congress and the White House to raise the debt ceiling in place, one would think that the market should be in immediate rally mode. It has not yet done so. The larger backdrop of a slowing global economy, continued high unemployment, and the reality that government spending will shrink in the future are all contributing to the market’s uneasiness. Despite governments’ best efforts, the global stimulus enacted over the past two years has simply not produced the growth needed to sustain our credit-fueled spending binge of the past three decades. Efforts now turn to reducing the size of government. If that doesn’t work, taxes will have to go up. Like it or not, this is the reality we must face together. And under this scenario, there are specific assets that should flourish with many many others withering.
At the present time, we are continuing to hold fully invested positions in all major market areas that we invest in: U.S. Dividend Paying Equities, U.S. Growth Equities, Foreign Emerging Markets, U.S. Real Estate, and U.S. High-Yield Fixed Income. The lone exception is commodity-based equities (oil, copper, wheat, corn, gold) as this segment of the market has demonstrated far less predictability that we believe is acceptable. While the optimal trends that we follow are deteriorating for all of these market segments, none are actually in decline. They’re close, but not quite there yet.
And often, the process of finding a major market top or bottom can take time. I’ve learned over the years that markets don’t just “top out” nor do they “bottom out” in a day. Both are processes, not single points in time. In 2000, the NASDAQ Composite Index (mainly tech stocks) took the better part of six months to initiate a clear downward trend. It took almost as much time for the S&P 500 Index to find a bottom in 2002-2003, and nearly three months for the market to top out in late 2007. These periods of time can be a bit grueling, volatile and unnerving. But the current market environment hasn’t quite gotten there yet. Most positive trends are holding on (some barely so), and so the time to take proactive action isn’t quite here.
And I stress “quite.”
With all of the headline-grabbing news of the past few months, it would be understandable for any investor to feel like their head is spinning right now. With the recent debt-ceiling vote and a slowing global economy and good news-bad news employment figures and quarterly corporate earnings data, the amount of factors that could push the market significantly higher or significantly lower are almost too numerous to count. Fact is, confusion and anxiety and fear sell all too well. The constant 24-hour news cycle tells us so.
But there’s one piece of data where ALL of these factors – indeed, all possible economic factors – come into focus: market price. Every day, the price of every investable security changes based on the current day’s news. All of the good news is factored into the price, as is all of the day’s bad news. When good news prompts crowds of buyers to step up and add to positions, the price of whatever it is they’re buying goes up. When bad news prompts a crowd of sellers to take action, the price for whatever they’re dumping goes down. When rising price trends turn downward, a simple adjustment in an investor’s portfolio becomes necessary. As always, we stand ready to do so.
Fact is, price alone tells truthfully what the crowd of investors believes something is worth. While it can exaggerate value in the short term, it is the only place where the effect of human activity (buying and selling) is open, honest and unbiased. Every individual investor, every mutual fund manager, every hedge fund, every institutional trader – everyone – impacts market prices in their own small (or not so small) way. We might not always like the direction the market goes when you get a large enough crowd all acting in concert, but understanding this fundamental truth about the markets is so important to investing successfully and sanely.
With the hundreds or thousands of possible factors that prompt investors to act, it is quite impossible for any one individual investor to consider them all. But by paying careful attention to price trends and by having a “sophisticatedly simply” way to figure out the time frames over which the most important trends exist, one can be quite successful in recognizing that there is a time to take action and a time to simply hold your positions. The time to reduce or eliminate exposure to the markets may soon be upon us.