Another reader writes: "Hi Scott, what's your thoughts on this?:"
"This" being a blog by a NY based Investment Advisor explaining his reasons for a positive outlook on equity markets entitled: "4 reasons the Dow is headed toward 20,000 by the end of the Year:
As a contrarian, I would tend to think that this argument might have some merit. If the majority of traders are already positioned to take advantage of lower equity prices (for perhaps all the right fundamental reasons) the short-term path of least resistance is likely to force buying and drive prices higher when these positions become no longer profitable.
Historically (since the peak in 2007 through the crash of 2008-09 and beyond, bullish / bearish sentiment (in white) has had mixed results in leading markets (Dow in yellow). The Gap widening since 2014.
We have focused in recent weeks on the impact of Corporate Share Buy-backs for distorting the true picture and it is possible that as long as this continues (or until it doesn't), this gap will continue to widen. But what should happen if corporations should find themselves with a need to raise capital and they need to access the equity market to do so?
Canadian banks had to re-capitalize last year and raise money in the preferred share market. Look what happened there: a decline of more than 20% (in the preferred share index).
2) Market Resilience - Between the attack in Brussels and Fed officials calling for rate hikes, stocks could have easily fallen in recent weeks. They haven't.
Actually, to be more precise: some Fed officials would like to see higher rates (Chair Yellen's latest speech had a more cautious tone). But the Bank Of Japan, The Peoples Bank Of China and the European Central Bank have all been aggressively easing monetary policy to counter the financial market volatility that we saw in January and early February. I would put "market resilience" to date as a result of easier monetary policy globally (another possible distortion to where markets should really be?)
3) Breadth- The number of S&P 500 stocks above their 50 day moving average went from less than 10% to above 90% in the past 2 months, a rare and bullish signal.
There are literally hundreds of technical studies we can look at to try to determine market direction. On its own, one study can send a positive signal, while many others, simultaneously, can send the opposite. The key is the volume of trade (bottom of chart). If a market moves up on low volume, then it will not have much staying power. That is what we have seen lately:
4) The Fed - The Advisor (in his blog) doesn't see higher rates this year, and that should be a tailwind for stocks.
The Fed will not (in all likelihood) raise rates if economic circumstances do not warrant it. The domestic US economy is grinding along with strong employment growth, but there are many signals that are showing less than robust growth.
The theory that lower rates (or at least not higher rates) is good for stocks is misleading on a number of fronts. Low interest rates force investors into riskier assets as they chase higher returns. However, the fundamentals cannot be over-looked.
Our job as portfolio managers is not to gamble on whether a market will rise in price in the short-term or not. It is to make sure that we are not taking undue risk to get returns for our clients (and ourselves for that matter, because at High Rock we own the same assets as our clients).
Would we like to see equity market prices go higher? Of course, because that would increase the value of our and our clients collective net worth and in the long-run we expect that if corporations are growing and paying dividends it means that they are working in our (the shareholders) best interests.
Our diligence is in determining if and how much we should allocate to any asset class. If it represents value, then it is a wise investment. If not, we should not have ownership (or at least limited ownership) of it.
Today is webinar Tuesday at High Rock where we will host a live webinar for our clients to discuss our interpretation of value, relative to what we see in the global economy and financial markets. We will post the recorded version on our website at about 5pm EDT, so feel free to have a listen:
Scott Tomenson,CIM Managing Partner, Chief Investment Strategist