5 Things To Ponder: Motley Cognizance

Tyler Durden's picture

Submitted by Lance Roberts of STA Wealth Management,

It has been an interesting week in the financial markets as the current correction process has continued. As shown in the chart below, the correction has primarily occurred in the mid, small and international equities as money has rotated into mega-large cap stocks for safety.


(The chart above shows each index on a performance basis relative to the S&P 500 since mid-August.)

The chart above suggests a couple of things:

1) Portfolios that have been allocated outside of a large cap domestic stocks have performed substantially worse than market headlines would suggest, and;

2) The leadership of the market has narrowed markedly in recent months which historically has been an indicator of late stage "bull-market" cycles.

The current correction in the S&P 500 has taken the index into very oversold territory on a short-term basis as shown below.  (As an aside, I do find it somewhat humorous to see the "panic" of individuals over a 3.4% dip. When a real correction occurs the "stampede for the exits" could be far greater than currently imagined.)


This short-term oversold condition should fuel a bounce off of the long-term support that has been in play since late 2012. Such a bounce will give investors an opportunity to rebalance portfolios while we wait for confirmation of a continuation of the "bull" rally. The failure of the market to attain new highs will suggest that a potential trend change has begun, and further correctionary action lays ahead. As discussed yesterday, it is "portfolio management" that creates long-term investment success by avoiding periods of capital destruction.

With that said, this weekend's reading list, as the title implies, is varied collection of observations to exercise your "grey matter." I have also linked opposing points of view to balance opinions.  Enjoy.

1) Warning Flags In The Stock Market by A. Gary Shilling via Bloomberg

"Their enthusiasm waned in mid-January because of emerging-market woes, but soon returned, taking major indexes to all-time highs. Nevertheless, a number of warning flags are flying today. Among them:"

  • High P/E Ratios
  • Slow Economic and Corporate Revenue Growth
  • Earnings Dependent on Profit Margins
  • Fed Tapering

Read Also: Markets' Rational Complacency by Nouriel Roubini via Project Syndicate

2) Market Valuation Overview by Doug Short via Advisor Perspectives

"As I've frequently pointed out, these indicators aren't useful as short-term signals of market direction. Periods of over- and under-valuation can last for many years. But they can play a role in framing longer-term expectations of investment returns. At present market overvaluation continues to suggest a cautious long-term outlook and guarded expectations. However, at today's low annualized inflation rate and the extremely poor return on fixed income investments (Treasuries, CDs, etc.) the appeal of equities, despite overvaluation risk, is not surprising."


Read Also: Valuation Myths by Jeffrey Saut via Advisor Perspectives

But Also Read: Shiller's CAPE - Is There A Better Measure by Streettalklive.com


3) The Middle Class Is Poorer Today Than In 1989 by Matt O'Brian via WP Wonkblog

"The economy has gotten bigger, but much of that growth hasn't reached the middle class. Indeed, the top 1 percent grabbed 95 percent of all the gains during the recovery's first three years. And that's not even the most depressing part. Even adjusted for household size, real median incomes haven't increased at all since 1999. That's right: the middle class hasn't gotten a raise in 15 years."

Read Also: IMF Warns Of Mediocre Growth For Years via Reuters / DW

For More Study On The Middle Class Condition Read: For 90% Of Americans There Has Been No Recovery by Streettalklive.com


4) Peak Housing by Mark Hanson

"The take-away from last month’s housing data was that 'the market was returning to normal', which despite the persevering weakness, was viewed as a 'great thing'. This overly-simplistic and flawed assumption was made, as the all-cash cohort demand dramatically cooled and distressed supply and sales plunged YoY.

What people are suffering from is a lack of a medium-term memory, as what’s happening today happened in 2007/08; 'Peak Housing.'"



5) When Bad News Becomes Bad News by Albert Edwards vis ZeroHedge

"There were two key parts to our Ice Age thesis. First, that the West would drift ever closer to outright deflation, following Japan?s template a decade earlier. And second, financial markets would adjust in the same way as in Japan. Government bonds would re-rate in absolute and relative terms compared to equities, which would also de-rate in absolute terms. This would take many economic cycles to play out. Previous US equity valuation bear markets have taken 4-6 recessions to complete ? we?ve only had two thus far.


Another associated element of the Ice Age we also saw in Japan is that with each cyclical upturn, equity investors have assumed with child-like innocence, that central banks have somehow ?fixed? the problem and we were back in a self-sustaining recovery. Those hopes would only be crushed as the next cyclical downturn took inflation, bond yields and equity valuations to new destructive lows. In the Ice Age, hope is the biggest enemy."


Read Also: Are We In A Permanent Liquidity Trap? by Cullen Roche via Pragmatic Capitalist

But Also Read: What Is A Liquidity Trap? by Streettalklive.com

"October: This is one of the particularly dangerous months to invest in stocks. Other dangerous months are July, January, September, April, November, May, March, June, December, August and February.” - Mark Twain

Have a great weekend.

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ebworthen's picture

Got to love Mark Twain (Samuel Clemens), the American of his time.

The things he said still ring true.

kaiserhoff's picture

There is probably no uniquely American criminal class...,

  except Congress.   Samuel Clemens

stant's picture

If the world is coming to a end I am moving to ky, they Are 20 yr behind everyone else. Samuel clemens

NoDebt's picture

"The things he said still ring true."

THat's because human nature never changes.  Governments come and go, financial systems, technologies, fashion.  Human nature stays the same.

slaughterer's picture

The algos have been Stockholmed and a BS earnings season is about to fuel their stop-run engines.  Forget about shorting until next FOMC panic.  

Keltner Channel Surf's picture

Regarding reading lists, in today's world it seems only one thin volume is necessary:  Camus' "Myth of Sisyphus"

Bell's 2 hearted's picture

6) How much is Lance paying ZH?

Dr. Engali's picture

Hey, didn't you give us three things to ponder earlier? Now I have five more on top of ebola and ISIL/ISIS/IS? Fuck I'm going to need a couple bottles of Crown to drink this weekend while I'm hiding under my bed with my anti-terrorist scissors. .

slaughterer's picture

Lance is like the douche that gets tenure at UC Irvine doing BS theatre and theory riding the faith and benevolence of the uncomprehending.  He attaches clothepins to the nipples of 22-year-old EU acolyte girl drug-addict prostitutes who he secretly pays to photograph in demeaning poses in hopes of being like Gene Simmons one day.  Or somethiing like that.  Check his FB for more.  

lasvegaspersona's picture

whoa..Lance is more interesting that most of my friends...what kind of clothes pins?...the springy kind?...got visuals?

lasvegaspersona's picture

I kind of view the markets as the Fed trading with itself. No trading costs and any small fry that sell are just sucked into the borg.

Is there any proof that real humans are still in 'the market?'

Consuelo's picture

But most of all...   Don't forget to call STA Wealth Management to make sure and let THEM 'manage' your portfolio - because after all, you're too Fucking Dumb to manage your own money...   See Lance, did it all for ya right there, and I don't even charge the - what is it now, 2% annual fee...?

Mesquite's picture

"October: This is one of the particularly dangerous months to invest in stocks. Other dangerous months are July, January, September, April, November, May, March, June, December, August and February.” - Mark Twain

Absoutely love it...!!

AdvancingTime's picture

 Those of us who have had the misfortune of losing a lot of money fast will tell you we never saw it coming or that it got far worse than we envisioned in even our worse case scenario. Sure they talk about diversifying but often even this recipe is not guaranteed to protect you.

Way back in 2008 when the meltdown was just starting I found myself on a cruise ship in Greece where one of my fellow passengers who had embarked on this strategy was withering in pain. We are often lulled into complacency and told how markets are regulated and precautions have been put in place to protest us but  let me make it crystal clear, once it is gone it is to late. More on this subject in the article below.