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Weekend Reading: The Coin Flip Market

  • Written by Syndicated Publisher No Comments Comments
    August 31, 2016

    As summer begins to fade, and kids return to school, the focus once again turns to the annual event of Central Bankers in Jackson Hole, Wyoming. However, if you only looked at the market as a gauge as to the excitement of the event, well it must have been one pretty boring after-party.

    SP500-MarketUpdate-082516-2

    The current action is aligning more closely with a normal corrective event from an extreme overbought condition.During such a “normalized” market correction, the market should pull back to the most recent support, hold that support level and turn higher if the current bullish trend is to remain intact.

    However, with all other indicators now pushing extreme levels, a correction from current levels could be somewhat larger than currently anticipated. As I discussed recently:

    However, there is a more than reasonable chance, as I laid out at the end of July,  for a deeper correction in the next 60-days.  The chart below shows the potential drawdowns from current levels.”

    SP500-MarketUpdate-082516-4

    “Here is the point. It would take a correction from current levels to break 2000, which is very important support for the markets currently, to even register a 10% correction.

    Given the current bullish exuberance for the market, this is probably unlikely between now and the election.Therefore, even a ‘worst case’ correction currently would likely be an 8.5% drawdown back to major support.  Of course, for most individuals, even such a small correction would likely feel far more damaging.

    The problem for individual investors is the “trap” currently being laid between the appearance of strong market dynamics against the backdrop of weak economic and market fundamentals. There will be a collision between the fantasy of asset prices and the reality of the underlying fundamentals. This will particularly be the case if the much anticipated rebound of economic growth and earnings fails to materialize. 

    SP500-MarketUpdate-082516-5

    With longer-term combined sell signals currently in place and the market still processing a broadening topping pattern, the extremely high levels of “complacency” are likely misplaced.

    As I wrote previously:

    “Take a step back from the media, and Wall Street commentary, for a moment and make an honest assessment of the financial markets today. If our job is to ‘bet’ when the ‘odds’ of winning are in our favor, then exactly how ‘strong’ is the fundamental hand you are currently betting on?”

    In other words, over the next few days to weeks the market is at best a “coin flip” currently. However, the longer-term outcomes are heavily stacked against those betting the markets only go up from here.

    Here is what I will be reading this weekend.

    Images: Flickr (licence attribution)

    About The Author

    Lance Roberts – Real Investment Advice

    After having been in the investing world for more than 25 years from private banking and investment management to private and venture capital; Lance has pretty much “been there and done that” at one point or another. His common sense approach has appealed to audiences for over a decade and continues to grow each and every week.

    Real Investment Advice: Bringing the complex world of politics, economics, investing and personal financial wealth building to you in simple, easy and informative way.

    Real Investment Advice is the home of the daily blog and weekly newsletter from Lance Roberts, Chief Portfolio Strategist for Clarity Financial. If you want to understand how money and the economy really work, this is your place to start.
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