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I’ve Seen a Lot Worse

     These days, we’re taking a lot of calls from prospective and existing clients about whether or not this is a good time to be adding to investment accounts. Most really want some sense of comfort that they are not going to be putting money in right as the bull market is ending. For this update, I’ll offer some sage advice on this subject both from a personal finance perspective as well as today’s market conditions.

 

Personal Finance 101

 

     When should you add money to your investment accounts? If I were to ask Lauren and Alex, our current and future certified financial planners, I know what they would say. They would say, get on a regular plan for savings and investing that is not dependent on market conditions. In other words, avoid the temptation to add money after you read a big headline like “Nasdaq crosses above 6000 for the first time!” (4/25/2017). Similarly, we want to avoid those highly emotional moments, when markets are down hard and we feel compelled to sell, sell, sell as Jim Cramer loves to say. As our regular readers know, we do offer a solid system which identifies oversoldmarket conditions as reasonably good moments to add money to investment accounts via our "Calling All Cars" announcements to clients. In this way, we can help our clients answer that question and get money to work when prices are low or discounted. I wish more of our clients would act on this information, but unfortunately only a few ever do. It’s actually very hard to add money when the markets are down and headlines are warning of the end of days (always a great buying opportunity). So in the absence of a good system for identifying lows or following our timely Calling All Cars advice, the best system for adding to investment accounts is by doing so with some regularity, like quarterly or monthly, as a percentage of your annual income with clear retirement, education or estate goals in mind. If you are engaged with such a plan, good for you. You might enjoy the rest of this update, as the chances of higher prices ahead are still very good.

 

I’ve Seen Worse

 

     In the last week of April, the negativity surrounding the future of stocks was palpable. Sentiment figures reflected a deep sense of doom around the 20th of April as shown by the “Dumb Money” levels of SentimentTrader.com below. Dumb money is generally the smaller, less informed investor who follows headlines and believes everything they read. They are usually wrong on the future direction of the markets as most sentiment indicators tend to be dependably contrarian. As shown in Red, the CONFIDENCE level of Dumb money by April 20th fell briefly below 50 as it tends to do at some of the better buy spots.

 

 

 

     Meanwhile the Smart Money shown in Blue, rose above 50% giving the Dumb money indicator a little kiss. You can see the same series of events surrounding election time last November and in June of 2016 surround the Brexit vote. These “kiss” moments for sentiment have proved to be great buying opportunities. Our own system confirmed the short term buys on April 20th and 24th and we used them to deploy the majority of available cash to new investments. The markets are largely out to all time new highs again now so these look like productive entry points.

 

     Sentiment is just one of our indicator themes that form a dashboard for Net Exposure. We also look at volume, breadth, advance/ decline lines, leadership, relative strength, and fundamental valuations. As I said, in the headline, I’ve seen a lot worse looking market conditions in my time. While valuations are still not attractive, the trend of this bull market is still strong and healthy with few indications of pending recession or a deep correction. Highly valued markets are riskier than highly discounted markets but bull trends can run for a lot longer than most investors would perceptively expect. These conditions have been in place since the lows of the mini-bear market in February of 2016 and nothing has changed.

 

Opportunities in Internationals

 

     If you hadn’t noticed, our various strategies have built up an oversized weighting in global and international ETFs, stocks and global bonds. For those wondering where we might deploy new money, this continues to be one of those investment opportunities. Specifically for the first time in several years, we have full positions in emerging markets, emerging Asia, India and now Europe, which is suddenly catching up to the rest of the developed world. We believe this outperformance will continue as long as the US dollar remains stable at these levels. There is a significant gap between the 10-year performance of most of Europe and the US, which we expect will close over the next several years (see below from Bespoke Research). If Trump manages to get anything done in the vein of protectionism or Border Adjustment Taxes, you can assume that the US dollar will rise strongly again putting a wet towel on earnings. But so far, he has done almost nothing and global markets are benefitting.

 

 

 

Half Full/ Half Empty

 

     Again, for those asking about adding new money to investments, we thought it might be appropriate to offer a little long-term perspective. On the 25th of April, the Nasdaq broke through another 1000 level marker, specifically the 6000 level for the first time in history. The last level down at 5000 was broken on… wait for it… March 9th, 2000. Bespoke provided this excellent chart showing the number of days between 1000-point thresholds on the Nasdaq. The most recent break above 6000 marks the end of an enormously long dry spell of 6,256 days. So the half full perspective for those wanting to add a new month to investments would argue that the Nasdaq is just now finding new highs after nearly 17 years of loss and recovery. As you can see in the late 90’s, after a similarly long dry spell, the Nasdaq went on to conquer several more 1000 point thresholds before the bull market ended in 2000. The half empty perspective would suggest that prices are again high enough that we should carry some significant worry about potential losses. I don’t have an answer for this one but I thought it was meaningful in this context.

 

 

Sell In May?

 

     In the short term, it would be irresponsible for us to conclude without mentioning that we have reached the end of the best cycle of the year, which runs from November through April. Sell in May and Go Away does have an incredible track record. So let’s not get too excited about any of the good news and higher highs in the markets considering the time of year. We might find the best trade in the days to come is to take profits and look again in the fall. Some would appropriately say, Buyer Beware. We’ll just stick to our program of setting stops on current positions and enjoy the ride for as long as it lasts.

 

That’s it for now

 

Cheers

Sam Jones