Weekend Reading: It’s Probably A Trap

April 22, 2016

59

Courtesy of Lance Roberts of Real Investment Advice.com

Earlier this week, I noted that due to the technical breakout of the market above the downtrend line from last May, an increase in exposure to equity risk was required. In 3 Things: Retail-less, Valuation, End Of The Bear?, I wrote,

“With the breakout of the market yesterday, and given that ‘short-term buy signals’ are in place I began adding exposure back into portfolios. This is probably the most difficult ‘buy’ I can ever remember making.

As I stated, buying this breakout goes against virtually everything in my bones as the fundamental underpinnings certainly doesn’t support taking on equity risk here.

We are moving into the seasonally weak time of year.

Economic data continues to remain weak

Earnings are only positive by not sucking as bad as estimates

Volume is weak

Longer-term technical underpinnings remain bearish.

It is the summer of a Presidential election year which tends to be weak.

The yield curve is flattening

Bonds aren’t “buying” the rally

While I am increasing exposure here, I do suspect that price volatility has not been eliminated entirely which is why I remain cautious.

Furthermore, the “bullish case” is currently built primarily on “hope.”

Hope the economy will improve in the second half of the year.

Hope that earnings will improve in the second half of the year.

Hope that oil prices will trade higher even as supply remains elevated.

Hope the Fed will not raise interest rates this year.

Hope that global Central Banks will “keep on keepin’ on.”

Hope that the US Dollar doesn’t rise

Hope that interest rates remain low.

Hope that high-yield credit markets remain stable

I am sure I forgot a few things, but you get the point. With valuations expensive, markets overbought, volatility low, and sentiment pushing back into more extreme territory, there are a lot of things that can go wrong. “

In other words, it’s probably a trap.

I highly suspect that within the next week, or so, I will be stopped out of recent positions. That is the risk of managing money.

However, given the ongoing Central Bank interventions, verbal easing by the Federal Reserve and an excessiveness of “bullish hope,” it is likely that prices could indeed more higher in the short-term.

As John Maynard Keynes once famously quipped:

“The markets can remain irrational longer than you can remain solvent.”

This weekend’s reading is the usual series of opposing views to reduce the inherent confirmation bias that exists by remaining too bullish and bearish. An honest assessment of the risks and rewards will always lead to better long-term outcomes.