This rally has some caveats

February 4, 20234 Comments

I’ve had several questions come in  after I posted some conflicting blogs last week. In two blogs, I spoke about some of the factors that might suggest more potential downside to come. Read those blogs here and  here. Then, I posted an interview with Jay Kaeppel, who provided another set of data points suggesting some positives and negatives – here. Finally, I posted my latest Bear-o-meter reading, which went into “Bullish” territory after staying in “High Risk Alert” territory since April 2022. Of course, even in that bullish blog, I offset that outlook with a negative data-point coming out of “Smart Money/ Dumb Money” confidence readings. I can appreciate the confusion one might have over the mixture of bullish and bearish factors out there.

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Our job as investors

You and I have similar tasks as investors. For example: My job as a Portfolio Manager and Analyst is to make informed decisions by weighing the factors within my proven system. Its clear that any robust system will illustrate some factors that are in conflict with some of the data points followed. No all-knowing crystal ball in my system! Its the weight of the evidence we need to observe. And, we must adhere to a systematic structure that will help us move in or out of markets sensibly with minimal downside – or- a loss of opportunities. Analysis of the stock market is not a binary “yes/no” discipline like mathematics. Twelve divided by 3 is 4. This is an absolute. 12 divided by 3 will remain 4 tomorrow and again next week and next year. There is no “well, on the other hand, it could actually be 7” counter-evidence that someone else can present. Stock analysis, on the other hand, is all about probabilities. It’s not about absolutes.

One reader observed that it seems to be more the technical analysis side (trend, breadth, volume, sentiment) right now that points to a bullish viewpoint. The fundamentals (earnings, valuations) and economic factors (Fed, inflation, economic cycle) are not so bullish. This is an astute observation. If you read my blogs – you know that the background is that of high valuations, high inflation, possible stagflation, and possibly inaccurate market hope/expectation of monetary easing. These are all fundamentally bearish.  Moreover, a couple of readers noted that well-known market traders like Jeremy Grantham and Michael Burry are bearish. These guys have reputations for accurate market predictions. But, the charts and breadth say otherwise.

Morgan Stanley’s chief strategist thinks investors are in for a bumpy ride after they realize there’s no more Fed rate cut ‘heroin’
“Once people realize the Fed’s not cutting rates—there’s no more heroin, so to speak—then we’re going to price the fundamentals, which are clearly deteriorating in our view,” Wilson told CNBC Tuesday.

Read in FORTUNE:

So – questionable valuations, questionable market sentiment, bearish viewpoints from smart money. Yet, those darned technical trend signals are screaming buy.

So what’s a poor lad or lassie to do?


I’m going to re-print an edited response to a regular reader of this blog that summarizes my best answer to this question. I hope it helps:

“This is the kind of thing we face as investors sometimes. I hope you took my online course, as it outlines how to deal with such conflicts. But, in a nutshell, you need to follow your own system. In my case, I use trend as the primary indicator, and the Bear-o-meter (sentiment, breadth, seasonality, momentum) to guide my degree of commitment.  After recognizing primary trend and reading the Bear-o-meter, Craig and I make decisions regarding the % of commitment to equities, % commitment to beta, and % commitment to cash allocations in the portfolio.

We also follow a systematic approach as to how we leg into – or out of – the market. Again, this is discussed in the online course.

So–here we have the primary part of my system (trend) saying “get in”. But my trend rule has a caveat that says we need to wait for a number of days before a breakout is confirmed. In this case, we need to see if 4100 on the SPX sticks for absolutely minimum of 3 days.  Because it literally just broke 4100 2 trading days ago, I will wait to later next week (> 3 days) to confirm that breakout.

Because we have within the Bear-o-meter some forward-looking risk indicators (Smart/Dumb $) suggesting potential trouble ahead, I will – assuming 4100 holds, buy in with perhaps 1/4 of my cash. Then, as the market moves, I will commit, or pull back, each week.

Cake & eat it…

We all want to buy the bottom and sell the top. If someone could do that with consistency, I have yet to meet them. A system like mine, despite the inherent faults of lagging the peaks/bottoms, still  provides the best trade off of long termed risks/rewards that I have come across. I’ve learned over the long term that if I follow my system, it will:

  • Control damage if things turn sour,
  • Get me in at a reasonable pace if things keep going up.


Cake and eat it too kind of stuff…
Hope that helps


Interview with Bruce Joseph – Canadian real estate expert – coming soon.

I expect to have it posted by the middle of the coming week



  • Hi Keith…good summation of the current situation and your cautious hesitations/caveats.
    Just for the record, the SPX has now closed above 4100 for the last 3 trading days covering Feb. 1-3, not just two.
    An interesting current market crossroad dilemma!
    Also, I believe (but I stand to be corrected) that the fundamentalists will argue that a bear market bottom does not occur until a recession is declared and the Fed Rate has its first cut.

    • Yes Ross–I use 3 days as minimum but in this case looking to wait longer–I started counting first day after 4100 hit. But that’s semantics — waiting to see if it holds for the week and we shall go from there!

  • The tech rally, which is based on retail participation levels and numbers, and enthusiasm, but as you say, is frowned upon by the smart money, might fizzle out.

    Dell to lay off 6,650 workers, or 5% of its workforce and PC sales are down 37% year over year. With interest rates still going up by the Fed, and Bank of Canada, how can this “rain dance” of optimism by the retail investors come to fruition. Pundits say that the impact of jumps in interest rates may take 8 quarters to fully be absorbed by large corporations, so if there’s to be a turn-around, it would be perhaps a year from now, at the earliest. And go hand-in -hand with positive news from Dell, and others, which is not the case.

    The dumb money over smart money is still a thorn in the side of anyone jumping on the bull market band wagon.

    • Agreed, although we don’t want to fight the tape either. So its a balancing act


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