Weekend Reading: Charge Of The Light Brigade

July 21, 2017

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Courtesy of Lance Roberts, RealInvestmentAdvice.com

As you I discussed last week, we added risk exposure to portfolios with the breakout to new highs that came in conjunction with a short-term “buy signal” as shown below.

However, when we zoom out a bit, a different picture emerges. Note that in all 3-cases, there was a “Stage-1 Advance” followed by a correction which led to a “Stage-2 Advance.” The correction that followed then provided for the final bullish advance which I call the “Charge Of The Light Brigade.”

The “Charge of the Light Brigade” was a charge of British light cavalry led by Lord Cardigan against Russian forces during the Battle of Balaclava in 1854, during the Crimean War. Lord Raglan, the overall commander of the British forces, had intended to send the Light Brigade to prevent the Russians removing captured guns from overrun Turkish positions, a task well-suited to light cavalry. However, due to miscommunication in the chain of command, the Light Brigade was instead sent on a frontal assault against a different artillery battery, one well-prepared with excellent fields of defensive fire.

Although the Light Brigade reached the battery under withering direct fire and scattered some of the gunners, the badly mauled brigade was forced to retreat immediately. Thus, the assault ended with very high British casualties and no decisive gains. War correspondent William Russell, who witnessed the battle, declared:

“Our Light Brigade was annihilated by their own rashness, and by the brutality of a ferocious enemy.”

This current set up is very much like what faced the British Calvary. A market is that overly bullish, overly complacent and overly valued has already had horrible outcomes for those that charged headlong into it.

Simon Maierhofer recently noted much the same in a recent article:

“The blue arrows in the updated chart below show where the S&P 500 is currently within the larger bull market cycle.”

“Regardless of where exactly the market’s at, a correction is getting closer. The initial correction will likely be a wave 4 correction (see labels). Waves 4 are notoriously choppy and frustrating. This choppy correction should be followed by another rally (wave 5) and a more pronounced drop (likely late 2017 or early 2018).

In a nutshell, although the S&P 500 is unlikely to make net progress in the coming year, there will be an opportunity for investors to lock in profits (at higher prices) and avoid a significant draw down.”

I agree with Simon. Whether it is sooner, or later, the current run-up in stocks will end very much the same as they always have with investors “annihilated by their own rashness and the brutality of a ferocious enemy.”

For now, investors race forward with swords drawn, shouting the “bull market passive indexing” battle cry in the face of insurmountable odds solely with a conviction of invincibility.

But such is the nature of every bull market cycle in throughout history.

In the meantime, this is what I am reading.