Starting this week, your Friday note will include links to the previous morning missives for the week in case any charts or elements are missed – or if you would like to make reference back to same. Please recall that all notes are also posted in your Private Members Area.

All Hat, No Cattle

It’s deemed a Texas-born reference – I like it – especially in recent years given the nearly endless number of experts ponied up on stage to tell us the latest reason for Apocalypse Now.

More than finance, I studied psychology over the years. Most market movement is a result of actions triggered by emotional response to stimuli. Granted, some of that emotional response can be deemed logical and orderly. Indeed, most is not. And of course, throwing in the HFT garbage really gins up the joint near-term.

Ponder this with me for a moment:

It may seem a little small at first – but if we wash down those TUMS – one will see this is quick view of the SPY over the last couple years. I am a bit slow so I bracketed a few items in color that I’d like to reference:

  1. The red box brackets the majority of the trade range price action over the last many months. Admittedly, we have passed back and forth over the same price range many times.
  2. The blue box highlights the three periods where we dropped below that referenced trade range – and panic ensued. Check the boxes off – it was the end of the world – volume raced, investors fled, bond funds were flooded, equities were escaped and when all was certain to end – the markets recovered back to their former trade range.
  3. The green line runs from the current price about 9 minutes ago on the SPY – straight back in time across the chart. It’s last day of intersection is November 21, 2014 – the day before the Thanksgiving break that year.

I would argue in time, when we pause a few years from now and look back at this flat spot on the charts, we will recognize that we have been trudging through what could be deemed a bear market internally.

Chomping At The Bit

During this period, we have seen a continuing stream of reasons for this to finally – thankfully – be the end. It was all over – 18 times. Black Swans have been discussed until we are blue in the face. Experts have ponied up every reason imaginable for the doom we assuredly face ahead.

Except – we are where we were 18 months ago – still. Even after the collapse of a major sector of our economy – energy of course – with some trickle-down effect in the manufacturing and industrial areas as noted yesterday.

The reality?

Not nearly as sexy – but there a far easier – and much more logical explanation for the pause. Before I cover it – another snapshot in time is beneficial:

Pauses are not new. They have unfolded many times over the last 100+ years.

The Baton

You know that part of a relay race where they pass the baton. In the pass, one runner slows a bit as the other runner catches up.

Right now – as we speak – under all the noise and wasted chatter of chaos – the baton is passing.

The Baby Boom has been running the race. They are slowing down and passing the baton back.

Generation Y is picking up speed. And 86 Million of them are on their way.

Underestimate this tectonic shift at your own peril. The stage is set to be as surprising as it was in the early 80’s – when few saw what was coming. Like Yogi always said, “Making predictions is tough – especially when it’s about the future.”

Missed Signals

Pauses are good. They refresh, restore energy and permit time for things to be fixed, adjusted, improved.

Like I said, it is not exciting – but what’s building under the surface will be. Muddling along is never fun. It causes emotions to twitch – making us more susceptible to newsflashes which cause us to mis-perceive reality a bit more. Fears can grow where ghosts don’t exist. It’s a normal occurrence these days – as we are all wired pretty much the same.

It is far easier to sell fear than confidence. Even easier to embrace fear after the last 15 years of one roller-coaster after another. Now, every pause is instead 2008 all over again.

Remember – at real highs – very few want to know anything about the latest hedging tool for managing risk.

We are miles and miles away from that sentiment.

Recall Last Month

As April was closing, these notes hinted that I would not be surprised at all to see the onslaught of earnings drive a pause. After all – sell in May and go away is on the calendar every year. The summer swoon is next – note the first chart above again. The first two breaks below the red boxed price range were the last two summer swoons.

Both were scary – during both the crowd panicked. Both created values. Both were false positives on the Apocalypse Scale.

Sentiment Falters – Again.

After just a couple weeks of chop in earnings season, Dr. Ed tells us the Investors Intelligence Bull/Bear Ratio fell to 1.81 this week from 2.18 three weeks ago–which was the first reading above 2.00 since last August.

Bullish sentiment retreated from a high for this year of 47.4% to 39.2% over the three-week period. The correction count climbed for the third week from 30.9% to 39.2%–the highest since last September.

The AAII Bull Ratio dropped for the second week last week from 58.3% to 42.4% over the period. Bullish sentiment fell from 33.4% to 22.3%, while bearish sentiment rose from 23.9% to 30.3% over the two-week span.

Like I have said for years – if you think the masses are two bullish – just give me a few weeks of red ink – and they will all be gone.

It’s Not Just Investors

Consumer confidence is waning as the political ugliness picks up. Small biz is also feeling a bit punk in the latest numbers:

What to Focus On?

What happens after the red draw-downs? Exactly.

Think Fiscal Not Fed

Our economy has been hobbled not by what we are doing – but what has been done to the economy. Massive regulations, massive tax loads, massive redistribution. A fifth-grader would have figured this out already. Choke the goose too long – it eventually gasps for air.

You can only shave so much off the top before a regular recovery becomes defined as “the weakest on record.”

Like I said, the churn we are felling is a massive generation building strength. We needed the same strength in the late 70’s/early 80’s to escape that negative vortex – that lost decade.

We are witnessing the same churn now. Inside the churn, processes and new industry shifts are being built which will create the energy to overcome the latest mountains in our way.

Be thankful for the mountains. They cause us to move forward. The mountains were the pauses – the flat spots in the charts above. What we are witnessing is not new – it is just not that fun.

But it is valuable for long-term investors.


Lots of chatter this week about layoffs. Huh? That is being thrown into the wash with Helicopter Money fears, Brexit fears, China fears, oil fears and Trump fears.

The only thing is this – layoffs as a percentage of the work force have rarely been lower. We could double from here and still be below the data seen at the tech bubble high 16 years ago and in a 35% smaller economy.

Sorry, but underlying fears often makes one perceive nutty things.

In Summary

May is unfolding pretty much as noted in your April notes. Lots of chop and continued frustrating churn. Two steps forward with one and three-quarters back is likely here for awhile still. Keep in mind that the summer doldrums are dead ahead.

The stage is set for a bit more struggle as noted but those periods should again produce opportunity if we stay focused on the proper elements at work – and the long-term horizon.

The point is this:

Another quarter or two and we will have round-tripped the largest setbacks in the energy pit. Earnings “growth” will magically appear again as numbers build from a new base after this shallow pause.

We have been digesting tremendous sector churn successfully even though it has been a struggle.

What excuse will we use when the markets break to new highs, in the midst of all this “mess”, and don’t look back?

We need to think larger.

Think demographics – not economics.

We are in far better shape than the masses understand.

Use dips, corrections and a summer swoon to your advantage for long-term values.

Make sure you check the Barbell Economy Portfolio in your Members Area.