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Weekend Reading: Going Nowhere Fast

Written by Lance Roberts | May 13, 2016

AAA-Weekend-Reading-Nowhere-Fast

Another week of choppy market action and the end result was a move to “nowhere.” As I stated previously, the current action is either a consolidation process or a topping process. To wit:

First of all, it is worth noting that despite all of the recent excitement of the markets advance, it remains extremely confined in a sideways trading range. This can either be good or bad news.

The Good: Sideways consolidations during bullishly biased markets provides the ability to work off excesses built up during the previous advance to provide the “fuel” necessary for the next leg higher.

The Bad: However, sideways consolidations can also mark the end of the previous bullish advance and the beginning of a bearish decline.

How do we know the difference? Normally, fundamentals tell the story. When earnings are still rising, market consolidations tend to resume to the upside. However, declining earnings have historically marked market topping processes much as we see today.”

SP500-Chart2-042616

While this time could certainly be different, historically such has not been the case.  At this juncture, the market has yet to confirm whether the recent price action is just part of a broader topping process or if the now somewhat well-aged bull market is setting up for a final advance. The most interesting aspect is the similarity between the current market action and that seen prior to the beginning of this year.

SP500-MarketUpdate-051216

With summer fast approaching, the markets still appear to be very fragile exposing investors to a similar “swoon” in the months ahead. This is particularly the case with both the economic and fundamental underpinnings still showing signs of deterioration. 

The inherent problem of “eternal bullishness” is the “willful blindness” to the underlying data in an effort to chase short-term returns. This leads to the unfortunate problem of being “all-in” on every hand which has a devastating consequence when a mean reverting event occurs.

In the end, it does not matter IF you are “bullish” or “bearish.” The reality is that both “bulls” and “bears” are owned by the “broken clock” syndrome during the full-market cycle. However, what is grossly important in achieving long-term investment success is not necessarily being “right” during the first half of the cycle, but by not being “wrong” during the second half.

For now, there is little to do but wait.


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“If you have large cap, mid-cap and small-cap, and the market declines, you are going to have less cap.” – Martin Truax

Questions, comments, suggestions – please email me.

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Lance Roberts

Lance Roberts is a Chief Portfolio Strategist/Economist for Clarity Financial. He is also the host of “The Lance Roberts Show” and Chief Editor of the “Real Investment Advice” website and author of “Real Investment Daily” blog and “Real Investment Report”. Follow Lance on Facebook, Twitter, and Linked-In

2016/05/13
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