In last week’s Friday reading list I discussed the concept of being an “almost fully invested bear” which was the premise of my speech at the 2015 World Economic Conference in Vancouver. (See full slide deck here).
As I stated, the presentation focused on two primary areas:
1) The leading cause of investor underperformance over time, and;
2) Signs that investing “bulls” should be paying attention to currently.
The focus on “risk management” is what consistently gets me labeled a “bear” even though portfolios remain nearly fully allocated currently.
However, as I discussed recently, there are evolving signs that market risks are beginning to climb rather significantly. Besides rising high yield rates, market volatility on the rise, and margin debt near record levels; the momentum of the market has deteriorated to the point that a monthly warning signal has been issued. To wit:
“Lastly, the long-term chart of the markets are beginning to flash warning signs that this extremely long bull-market cycle may be at risk. While it is still too early to make a more defensive call now, there are signs of significant deterioration in the overall “momentum” of the market. In the weekly X-Factor Report, I run a model for managing 401k plans that consists of the three (3) buy/sell indicators. (Subscribe for free e-delivery)
The chart below shows two of the three indications on a monthly basis labeled S1 (sell signal 1) and S2 (sell signal 2). There have only been three periods since 1998 where the S1 indicator has been triggered. The first was in late 1999 as the markets climaxed toward their peak in 2000; the second was in late 2007, and the third was in January of this year.”
“Considering that market momentum is waning, deflationary pressures are rising and economic growth is slowing on several fronts (along with a rather rapid decline in corporate earnings) it certainly suggests that risks are beginning to significantly outweigh the rewards. Is this suggesting that the next major bear market is underway? No. It does suggest, however, that investors should pay much closer attention to the inherent risk in portfolios currently.
The S1 signal could be reversed with a very strong rally that propels the markets to new highs. While this is certainly possible, it has historically not been the case. However, the market over the last few years, due to massive Central Bank interventions, has repeatedly defied statistical analysis and historical comparisons.”
I am becoming extremely concerned about the risks in portfolios due to the deterioration in the markets momentum and technical structures as of late. If this market is going to continue its “bullish advance” in the months ahead, there will have to a reversal of the“decay” that currently exists, and soon. One thing is for certain, when the market begins the next major reversion, I have no intention of being around to participate in that decline.
