Summer 2017 Stock Market Update

August 3, 2017 by  
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August 2017

As many of you know, we have been commenting for a while now about why much of the economic data does not bode well for the stock market.  For many fundamental reasons it can be argued that it is not realistic that the stock markets can keep hitting new all-time highs –  yet, it is happening.

We do expect, inevitably, a long overdue, correction – which usually helps keep the markets healthy.  So far, all but of a few indicators are pointing to an inevitable correction.  However, if history is any indicator, once those few hold outs come into line dare we say, that there may be more gains to come in the broader stock markets?  Here is why we have some confidence that we still have some upside:

  • Believe it or not there are still record amounts of investor’s cash sitting on the side lines since the last market crash in 2008. The general public is STILL not significantly “in” the markets – and massive bull markets don’t typically peak until the general public is in.
  • From a pure economic data prospective this bull market is still incredibly “broad.” There are hardly any weak spots.  Even gold is moving higher.
  • Where else are investors to invest to make enough profit to keep pace with a 2-3% annual inflation rate?  The answer is: Nowhere.  In fact, most so-called conservative bond funds have been showing negative returns for years now.  The U.S. Stock Markets are the best looking house in a bad neighborhood, to use a real estate analogy.

Perfect segue – Remember the last real estate boom?  By the peak, it seemed like everyone was “in real estate.” That’s what a peak looks like. But today, the general public is selling stocks, not buying. Investors are not piling in. They are getting out…

“Despite the relentless uptrend, there has not been a sustained rush into equity funds,” Jason Goepfert, of SentimenTrader.com, wrote on his site last week. Jason’s service tracks dozens of indicators to gauge what investors are thinking. “In early July, investors pulled more than $11 billion from domestic equity funds.”

The average investors is too emotional and therefore is makes decisions based on fear.  But the “fear of loss” is over played.  The fear of losing out on potential market gains has yet to flourish.The next progression in this historical, irrational investing pattern will be the “greed” stage. When greed overtakes fear of loss, then we’ll be getting close to a correction. We’re not there yet.

Further evidence pointing to more short term upside in the stock markets is once again based in history. During the Tech Boom of the late 1990’s, more stocks were falling than rising.  That was a warning sign.

The financial term for this data set is called the Advance/Decline Line.  The Advance/Decline Line is simply the running total of the number of advancing stocks in a day minus the number of declining ones.  In other words, when any bull market is being carried on the backs of just a few companies, it’s not a sustainable.

Just compare the data of today to 1999?  The opposite seems to be happening…

During the dot-com boom in 1999, the Advance/Decline Line was falling – signaling that the market’s overall health was poor. Today it’s showing the opposite. Take a look:

In short, it seems this market is healthy – for now.  But we must proceed with much caution, as always.

Therefore, we are recommending a great weight of our growth portfolios to equities for the short term – this includes reallocating more cash held in reserve into equities, as well.

As always, contact us with any questions or changes in your life.

In the mean time, enjoy the summer.

Richard St-Laurent, cwp