Cyclical Exposure Risk Has Diminished, but There's a Longer Term Technical Caveat
Investors should be aware of the fact that the markets may soon be pushing against the top of the secular consolidation resistance of the last decade-plus.
An old farmer worked his crops with a horse for many years until one day it ran away. Neighbors came and sympathetically spoke, "Such bad luck." "Maybe," replied the farmer. The next morning the horse returned with three other horses. "How wonderful," the neighbors exclaimed. "Maybe," replied the old man. The following day his son attempted to ride one of the new horses, was thrown, and broke his leg. Neighbors again came to offer sympathy. "Maybe," answered the farmer. The day after, military officials came to draft the young man, and upon seeing that his leg was broken, passed him by. The neighbors congratulated the farmer on how well things turned out. "Maybe."
The legendary Steven Tyler and Joe Perry definitively outlined the investment playbook for the holiday returning week: "I'm back in the saddle again, I'm back….Come easy, go easy, All right until the rising sun, I'm calling all the shots tonight…" After a brutal four-month risk battle (May-August) and what was coined a 'melt-up' period, ECB President Mario Draghi gave the markets the much-needed adrenaline shot to end the conflict. This, for all intents and purposes, has increased the clarity of technical direction and lessened overall market stance risk, and here's why.
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In examining the market's pattern since March, it's becomes evident investor confidence was again waning considerably as the demand side of the supply-and-demand curve became significantly influenced by volume as it decreased to levels not seen in the last 14 years (1998). Combining this with the August 21 reversal top at 1,426, uncertainty reigned. Conversely, broad investor sentiment seemed to have a Disney-like imaginary floor at 1,400 as investors waited for the traditional summer holiday to end. The sentiment buoyancy appeared not only in price, but in volatility as well. The month of August will most likely go down as the least volatile month in nearly a decade as the market's 14-day standard deviation dwindled to an astonishing 0.4%; quite different from the 2.5-6.9% we've seen in the last year.
Since last week's break north, my firm's CTI (Cyclical Trend Index) has once again returned to bullish, indicating cyclical exposure risk has diminished. (The CTI is a purely technical index which not only determines trend, but its associated risk.) This shift in stance has given us confidence to remove all hedging strategies and increase our long exposure. That's the good news... "Maybe." With that said, investors should realize another longer-term, technical caveat.
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In evaluating the monthly (15-year) chart of the market, investors should be aware of the fact that the markets may soon be pushing against the top of the secular consolidation resistance ("SCR") of the last decade-plus (~ 1,500-1,560). Since the publication of my firm's 100 Year Market Theory (100 YMT) in 2003 we have been pontificating that the US equity markets are, and will continue to be, in a secular channel correlated in time to the last secular bull market; 16-18 years (1982-2000). Over the last few years, since the 2009 bottom – the largest cyclical bear market in history – we have also stated this bottom marked the mid-point of the larger secular channel. That's the bad news... "Maybe."
When analyzing trends within trends – secular to cyclical – it's only important, for now, to focus on the cyclical, as that is where 'stance' is determined until risk shows its ugly head again. It is only when the cyclical stance shifts that technicians should turn to the greater secular trend. For now the rain has stopped, the clouds have begun to dissipate, the fog has lifted, and Wall Street cowboys are 'Back in the Saddle Again.'
We hope this helps and finds you well.
Editor's Note: Read more at Tesseract Asset Management.
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