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5 Things To Ponder: Mentally Conflicted

Submitted by Lance Roberts via STA Wealth Management,

I had a very interesting conversation with one my colleAgues yesterday about the markets and the economy. Essentially the discussion centered around the markets remaining near their all-time highs as economic data remained soft. Much like the "300" that defended Greece against the massive invading force of Persia, it is only a question of time before the battle is lost.

As I discussed on Monday in "When Will We Ever Learn..."

"The capacity for optimism is seemingly limitless, but the "sting" of failure is quite transient.

 

While it is in those failures that valuable lessons are taught, studies have shown that humans tend to suppress or substitute new memories over time.

 

George Santayana once said:

 

"Those who cannot remember the past are condemned to repeat it."

 

The phrasing itself certainly is catchy, and is often used in the financial media due to its underlying truth. If history is a guide to the results of previous actions, and those results were painful, then history should guide not only policy making (public and private) but our own behaviors as well.

 

It's hard to disagree with. Over the history of the financial markets (all the way back to the 1600's) speculative investing has repeatedly led to booms and busts.

 

Importantly, each of these "bubbles" involved an excessive level of speculation around some specific asset.

 

Of course, it is all rather obvious in hindsight. Valuations were high, the Fed was hiking interest rates and the love affair with stocks and leverage had reached historically high levels.

 

Today, there are many signs that the markets are once again approaching a "danger zone." Margin debt is once again at historically high levels; valuations are the second highest in history and the "love affair" with equities has pushed stocks to record highs. But these areas are really just a reflection of the excesses that are building elsewhere in the financial system."

The disconnect between economic underpinnings, market internals and "bullish" investor optimism leaves many investors/advisors "mentally conflicted." If they "sell" too soon, they might miss a further advance in the market. But if they wait too long, well, they have lived through that scenario previously.

This week's reading list is a smattering of conflicting views about the markets and the economy. As always, it is extremely valuable to analyze both sides of every argument. This reduces confirmation bias and leads to a better assessment of potential flaws that may exist in your investment thesis.


1) The US Stock Market And A Major Recessionary Warning? by Pater Tenebrarum via Acting Man Blog

"The deterioration in market internals is e.g. evident in new high/new low ratios that are inconsistent with a market making new highs, and a growing divergence between prices and advance/decline statistics. Also, an ever smaller percentage of stocks remains above important moving averages. Below is a chart depicting several of the most widely followed market internals (high/low percent, advance/decline line, S&P 500 stocks above 200 day and 50 day EMA).

 

What this essentially tells us, is that capitalization-weighted indexes are held up by an ever smaller number of big cap stocks. A the time of writing, a strong short term rebound in the stock market is underway. However, the underlying problems with trend uniformity and internals depicted below remain in place."

Read Also: Several Reasons To Remain Bullish On Stocks by Chris Ciovacco via Ciovacco Capital

 

2) "Extreme Fear" Is Back For The Stock Market by Heather Long via CNN Money

"What's going on? Investors are spooked by the same factors that have been around for months: China's slowdown, Greece's possible exit from the euro, and the Federal Reserve's first interest rate hike expected in September.

 

None of this is new, but it's getting real. On Monday, China's Shanghai Composite index fell a whopping 8.5% -- its worst single day decline since February 2007. While America investors don't have a lot of exposure to China's stock market, they do have exposure to China's economy since so many U.S. businesses are now operating there.

 

China's economic slowdown is the bigger concern. The stock market plunge is seen as more of a warning sign to the rest of the world."

 

Read Also: The Secret For Beating The Market by Nouriel Roubini via Project Syndicate

 

3) The S&P 500 And Stock Buybacks by Ironman via Political Calculations

"How different would the value of the S&P 500 be if not for the amount of stock buybacks that have taken place in the U.S. stock market since the end of 2008?

 

What we see from our highly simplified, back-of-the-envelope math is that through the end of the first quarter of 2015, the most recent for which S&P has reported data at this writing, the value of the S&P 500 would be about 324 points, or nearly 16%, lower if not for the progressive impact of share buybacks over the last seven years."

Read Also: Putting The "Buy Back" Craze Into Context by Eric Bush via GaveKal Capital

 

4) When Will The Next Recession Start? by Ed Yardeni via Dr. Ed's Blog

"I doubt that the business cycle is dead, though I suspect that inflation may be dead. As inflation remains subdued and central banks continue to provide ultra-easy monetary policies, the next recession may very well be a long ways off. If inflation makes a sudden comeback, a possibility I can't dismiss, then all bets are off. A meltdown in China's financial markets and economy might also trigger a global recession, which is why I am concerned about the renewed weakness in commodity prices, as I discussed last week."

Read Also: Recession Ahead? Gross Output and B2B Data by Dr. Mark Skousen via MSkousen.com

Read Also: Leaked Fed Staff Forecast Reflects Gloomier Outlook by Binyamin Appelbaum via New York Times

 

5) Investors Should Raise Cash by Michael Kahn via Barron's

"But what I find more interesting is that the last time the market suffered a significant correction, aside from last year's Ebola-inspired mini-panic, the industrials broke down first. That was in the summer of 2011 and the industrial sector broke down about a week before the broad market did (see Getting Technical, "Industrial Stocks Are Shutting Down," August 1, 2011). Although we cannot make a rule out of so few observations, it probably is a good idea to keep cash levels higher than normal."

Read Also: Its A Bounce For This Key Market Gauge, Or Else by Dana Lyons via Tumblr


Other Interesting Reads

Sometimes, Investors Win By Not Losing by Joe Calhoun via Alhambra Partners

Am I Too Bearish, Or Are you Too Bullish by Jesse Felder via The Felder Report

Jeremy Grantham's 10 Issues To Watch by Jeremy Grantham via ZeroHedge

6 Great Investors Explain What Makes Stocks Rise by Lauren Rublin via Barron's


"I have always found it valuable to study my mistakes" - Edwin Lefevre

Have a great weekend.