Week in brief: June 10

June 13, 2016

The past year? Tough time to own stocks. In the midst of a 21-month sideways consolidation period, the S&P 500 has dropped more than 12 percent on two separate occasions. Not to mention the pessimism stemming from the nation's tepid economic recovery. And the veritable munitions dump of cynicism that has been the presidential election process. Even as we've not even reached the conventions.
Still, last week saw the market hit a seven-month high. Moreover, the S&P index traipsed back above its 20-month moving average in March. And there it has remained. Which typically represents good news. Having happened only 26 times over the last 50 years. With the average return one year later being nearly 17 percent. Importantly, stocks were also higher three and six months later nearly 80 percent of the time. With the average returns of those time frames being 4 and 8 percent respectively.
Last week, the Dow Jones Industrial Average recapture the vaunted 18,000 level -- an important psychological benchmark -- for the first time since April. Short lived though it was. As volatility roared on Friday. Sending stocks lower to close the week. Closing 1.63 percent below last year's record high.
Given Wednesday's looming Fed meeting, updated economic projections and post-meeting press conference, the market will walk a razor's edge. As buyers and sellers white knuckle the wheel in anticipation of Mrs. Yellen's pronouncements.
Understand that investors continue to struggle with the idea of higher interest rates. While Yellen and Co. try to prepare markets for inevitably higher rates. Almost vaccinating the market to the idea that, before long, rates will move higher.
To some extent, the message has worked. But this week represents yet another test of Fed and investor resolve.
The market strength the Fed has engendered has been impressive given the negative market sentiment. According to a recent AAII survey, only 17.8 percent of individual investors are bullish. The lowest result in more than 11 years. And the sixth time since 1987 that bullish sentiment was below 20 percent while neutral sentiment was above 50 percent.
Why such pessimism? A multiplicity of reasons. Uncertainty being primary. Businesses and consumers appear lost amid a disorienting array of contrasting economic data, signals and messages. Not to mention the potential storm cloud of June 23rd's "Brexit Vote" which, regardless of opinion, most agree that if the Brits choose to leave the EU, volatility could reappear like Freddy on Elm Street. Just Friday, a surprise poll revealed growing support for the "leave" contingency. Like Saturday's Belmont photo finish, this contest could be decided by a nose.
So, what's next?
On average, the S&P 500's 26- and 52-week returns after the five previous occurrences of such apathy toward stocks was an impressive +11 percent and +27 percent respectively.
If you remain momentarily concerned about stocks, you are not alone. Nor are you contrarian. In fact, you're one of the herd. For many investors appear content to wait for the next shoe to drop.
Even amid recent gains, capital outflows have accelerated. Suggesting that gains have been fueled by corporate buying. Data shows $9.2 billion left global equities last week. The seventh consecutive weekly outflow. For 2016 to date, total outflows equal more than $100 billion. Which is unfortunate. Given that the S&P 500 sits immediately below an all-time high.
Really, people... what more do you want?
Skeptics complain that recent gains stem from short-covering. Which will likely end soon. However, short-covering is not a quick process. It continues because investors become even more attached to their short positions than to long positions. And it requires a lot of anguish to change that. More good news for bulls. Also positive remains the idea that, despite what the doomsday proselytizers report, the leading economic indicators reveal that a recession is not on the near-term horizon.
The bad? The Dow now confronts massive, three-year overhead resistance at 18,000. As does the S&P 500 at 2,131. Both of which it will require momentum, conviction and timing to reach higher highs.
And like Reds' victories or poetic Justin Bieber lyrics, such conviction has long been missing.
Sure, the market has wafted higher. But stocks seem to be losing steam. Mostly supported by new rounds of easing from eurozone and Japanese central banks. Volatility remains low. In fact, it's been more than a month without a market movement of plus or minus one percent. Which can only mean that something unexpected will soon occur. Upsetting the apple cart. Sending stocks lower as volatility jumps.
Perhaps the upcoming Brexit vote? Unexpected Fed move? Presidential politics? Nobody knows. Which is why it will certainly occur. After which the market will likely make another run towards the highs. And historically, the third week of July has oft represented the market peak. So there's some timing involved.
Remember, the herd is usually wrong. When everyone believes the market will drop, it will likely rise to spite them. For Mr. Market lives to disappoint the largest number of investors as frequently as possible. Not unlike your mom's youngest brother. The black sheep uncle from Arizona who always needs money.
To apply effective contrarian investment techniques? Forget about what you read in the news or see on television. By that time, it's too old to be of value. And just reinforces what you already know.
Instead, find a theme or trend that may be difficult for the masses to spot. Something that resides beyond the peripheral vision of the herd. Once identified, seek out a company, product or index that allows you to invest in that theme or trend. Research it to exhaustion. Quieting the nagging voice in your head that screams of the fallacy in your thesis, and denigrates the vehicle through which you intend to invest.
Finally, once the data appears to verify your analysis? Invest accordingly. Usually via a partial position. Enabling you to dollar cost average into your idea, even as short-term market fluctuations defy the gravitational forces of logic and reason.
Remember, you can't be an effective market navigator unless you're willing to look ahead. To try and gauge what lay just beyond the horizon. As opposed to right upon it. Where everyone can see it. Additional reports about the current seas you're sailing are useless. Only those that look ahead can add value. Use them to sail your ship to opportunistic seas. As well as to avoid those that appear stormy. But once you've sailed into a storm? You've no choice but to sail through it.
While we're on the subject of ships, it was just over 105 years ago that newspaper readers throughout the world digested accounts of a landmark maritime event. Occurring on the River Lagan in the port city of Belfast, astride the Irish Sea.
"Titanic, Big Ocean Steamer, Is Launched," read the St. Louis Post-Dispatch. "Will Go Into Service Late in the Year, While Sister Ship Will Soon Visit America."
Today, cruise ships carrying twice the bulk of that infamous ship cross our seas daily. Private companies build and launch rockets ultimately bound for the far corners of the universe. Train tracks are monitored by drones, capable of flying long distances to ensure the integrity of the rails, and so the safety of cargo and crew. We land robots on Mars. There to send back video of all they survey.
Yet, given all those advancements and abilities, we have been unable to return the economy to her proper orbit following her Titanic plunge in 2008. Why?
More on that topic in this week's essay, Growth's Death Knell: Ideology Over Pragmatism, found below.
Finally, last week brought closure to the lives of two American icons. Boxing champion Muhammad Ali and hockey great Gordie Howe. At Saturday's Reds game, my friend Steve pointed out that no less than Wayne Gretzky often recounts an experience he once had with both.
"I was in the Plaza hotel one time in New York. And I was standing in the lobby with Gordie Howe and I thought it was so amazing ... Muhammed Ali came over to say hello to Gordie Howe. And I was standing there thinking, wow, two of the greatest athletes and two of the nicest people of all time just standing in the lobby of a hotel chatting. That was one of the great sports moments for me. Something I'll never ever forget. They were both extremely personable and did a lot for people who were less fortunate everywhere."
Ali and Howe left indelible marks during their brief stints on this spinning orb earth. Touched hearts. Bolstered lives. Inspired many. Brought smiles. And reminded millions of what is possible, especially outside of their chosen professions, when one lives with both a full heart and an open mind.
May all this week's endeavors find you sailing smooth seas with the wind in your sails.
Weekly Results
Major markets were mixed last week. The DJIA gained 0.33%, while the S&P 500 was down 0.15% and the NASDAQ fell 0.97%. The Russell 2000 fell 0.02%. 10 Year Treasury bond yield fell 3.53%, with Gold finishing up 2.82%.

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