When Does the Dam Break?

Seems that is what most everyone is expecting. However, markets have an uncanny knack of NOT doing what is the perceived surefire cause and effect results from a connecting the dots exercise. I'm often reminded of the following Richard Russell quote “Most people have a hard time envisioning change, and they are almost incapable of envisioning major change. Most people are guided by their experience of the immediate past. If the past was good, they believe the future will be good. If the past was rotten, they believe the future will continue to be rotten. Yet anyone who has studied the history of the stock market knows this is not true.”  As an example, it's not hard to find someone espousing the belief that it is just a matter of time before the markets go down 50-60%- like it did in 2008.  For that, I say hold on there uno momento, Nostradamus.

Markets defy simple cause and effect thinking. We view markets as complicated systems and the best way to traverse them over time is by aligning portfolios with the prevailing trend.  We spend no time prognosticating simply because if our guess turns out to be correct, it is primarily the result of dumb luck. The process we follow as portfolio managers does involve analysis of fundamental and technical market attributes that can reveal probabilities and possibilities about the current market condition.  We attempt to discover what is taking place under the markets surface and not readily seen in the major indexes-- until much later. As an example: The weakening market process began (as it tends to do) with the number of small-cap growth stocks making new 52 week highs (deterioration started in April in our databases), progressed to the mid-cap arena and for about a month now has been working on the large cap group. There is a readily observable spread in the measures of demand (deteriorating) vs supply (selling increasing). These negative trend developments signaled a progressively defensive stance for our risk managed, trend following client accounts. Consequently, we are neutral to the market for the time being and content to observe the markets without capital at risk. Eventually, this all changes. At what level we, nor anyone else, can know with any degree of certainty. We think it best to let the market dictate actions.