Investors that attempt to time the markets require a degree of humility as Mr. Market continuously offers surprises around every corner. So, it was with a degree of humility that I boldly came onto the MoneyTalks show in the spring of 2018 with the narrative that a summer rally lay ahead and that the markets would most likely spend the majority of the year developing a key market topping formation. That story has in most part proven correct.
The question becomes what is in store next?
Utilizing our top down method of analyzing the markets, we find that there is much supporting evidence that the longest bull market in history has come to the final stages of its life. This conclusion is drawn by observing some converging indicators. First, strong growth and low unemployment, while on the surface appear bullish, drive central bank tightening and contract the overall market liquidity. This liquidity drain is corresponding with historically high valuations and a flat yield curve. These conditions have been present in almost all the past bull market peaks and again are ringing the warning bell.
But what is an average investor to do, and how does one market time a point of action?
This is where investors can bridge the macro fundamental conditions with technical signals. In this case, the deteriorating market breadth and lack of leadership in the markets continue to demonstrate that the market advance is being driven by fewer and fewer sectors and stocks. This is occurring at a time when global stock markets are deteriorating and in the case of many emerging markets, conditions have already turned outright bearish.
Why have the North American stock markets not responded yet? Interestingly, the global market place is chasing the highest yielding and best performing markets, which has provided a tailwind. The key question, when does the liquidity and sentiment shift on the market?
In our mind, the prudent course of action for many investors is to reduce their exposure to the markets. For over 7 years, asset managers have argued TINA (There Is No Alternative) to being in the markets because the return on cash and bonds was so incredibly low. That has materially changed over the past year. Short-term money markets have converged with the dividend yields making it now a viable alternative to holding cash.
For the more sophisticated investor, buying protective puts as insurance remains reasonably priced, particularly on the broader indices. As illustrated on the chart of the VIX, one can identify that we remain within the consolidation zones of the past decade.
Usually taking the action of liquidating your entire portfolio into cash is extreme, there is no shortage of reasons why conservative investors should not be raising cash and hedging risks as we move toward the 2019 year.
Thank you for reading.