Over the past few months, we have been writing a series of articles that highlight our concerns of increasing market risk. Here is a sampling of some of our more recent newsletters on the issue.
- Never Hurts To Ring The Cash Register
- Looking For A Sellable Rally
- Bull vs. Bear Case
- Don’t Fear A Bear Market
- Risk Happens Fast
The common thread among these articles was to encourage our readers to use rallies to reduce risk as the “bull case” was being eroded by slower economic growth, weaker earnings, trade wars, and the end of the stimulus from tax cuts and natural disasters. To wit:
These “warning signs” are just that. None of them suggest the markets, or the economy, are immediately plunging into the next recession-driven market reversion.
However, The equity market stopped being a leading indicator, or an economic barometer, a long time ago. Central banks looked after that. This entire cycle saw the weakest economic growth of all time couple the mother of all bull markets.
There will be payback for that misalignment of funds.“
As I noted on Tuesday, the divergences between large-caps and almost every other equity index strongly suggest that something is not quite right. As shown in the chart below, that negative divergence is something we should not discount.
However, this is where it gets difficult for investors.
The “bulls” are hoping for a break to the upside which would logically lead to a retest of old highs.
The “bears” are concerned about a downside break which would likely lead to a retest of last December’s lows.
Which way will it break? Nobody really knows.
This is why we have been suggesting raising cash on rallies,