Broker Check

What’s Next? Technical Analysis and Your Response


By:  James C. Denton, CFP®, Managing Partner

July 17, 2019


As I was kicking my day off with my daily data feed this morning, I was amused by three articles which looked at pretty much the same information but came to three separate, and at first glance, conflicting conclusions.  But that’s the way it is more often than not, I suppose.


Few of you have a solid appreciation of technical analysis, I’m not even sure I do to tell you the truth, but essentially it involves looking at, evaluating and drawing conclusions from charts showing trading patterns in a stock, index, or other indicator.  The difficulty is the results are in the eye of the beholder.  First, where you draw your lines will shape your conclusions, but where the lines should be is not necessarily obvious or a given.  Often, there is no right or wrong in where those lines really are, and there is a natural tendency in such a case to put them where you think they should be.  Result … you get the indicator you expected or wanted rather than the one the data is really trying to tell you. 


As I said, you probably don’t have a clue what technical analysis is, so any discussion is like it is coming from Charlie Brown’s Mom … “waaahhh, waahhh, waahhh”.  For those of you, however, who do enjoy this kind of data and discussion, the three specific articles to which I am referring are here (the most “technical” focus of the three), here (we’ll call this one “milestone”), and here (Cramer).


By providing you these links, I avoid some of the need to pontificate.  But I would be remiss if I did not provide you with my take away, and my own views on where we are and where we are most likely going from here.  Where am I drawing my lines, and what are they telling me?


I think it’s unavoidable to conclude that we are in the late stages of one of the most remarkable bull markets in history.  But “late stages” does not mean that the end is necessarily near, and other than the passage of time, there is really no reason to believe that is the case.  The fact that we are at a new high reminds people of the last time we were at similar levels, and from that, one conclusion is “is it time for it to happen again?”  The “Milestone” article is the best perspective for this particular fear.


FACT:  There is no statute of limitations on economic expansion, and as I (and others) have frequently said in the past, bull markets do not die of old age.  Rather, they are usually killed, either by investor euphoria and overreach (i.e., greed, and Cramer’s article is correct on this point), or by missteps by those charged with managing the economy.


The reasons for continued optimism are many and obvious to most.  Most everyone in America who wants a job has one, and recessions do not start from a point of full employment.  The most common negative effect of full employment is inflation, but none is to be seen anywhere [1].  Business profits continue to meet or exceed expectations much to the frustration of the nervous nellies who continue to predict, inaccurately, that they are going to fall.  Interest rates continue at historically low levels [2], and as long as businesses can borrow at low rates, they’re going to continue to expand and create new businesses, meaning new employment opportunities, and new economic growth.  We’ve talked about these and other indicators to the point that most of you, if you have been paying attention, could preach this particular sermon, complete with Biblical allusions and appropriate body language, from memory.  But the predictions of recession and bear-market-imminence are rooted in the “aging bull” theory which just is not supported from a historical perspective.


The real risks to the market may not be quite so obvious but are certainly worth discussion.  Recessions have often been brought on in the past by missteps by the federal reserve in their efforts to reign in an overheated economy.  Either by acting two soon, waiting too long, or acting too precipitously.  The task of the Fed is a difficult one, easy to mess up, not so easy to get right.  I think they are doing a pretty good job, but it’s not an easy one, especially with the outside distractions they face. 


Congressional action or inaction is a real risk and make’s the Fed’s job more difficult.  Our economy is dependent upon both monetary policy, the responsibility of the Fed, and fiscal policy, the purview of the congress.  Each has its own role, potential benefits and risks, and opportunities to screw it up.  Our dysfunctional congress has put too much pressure on the Fed for too long.  Congress needs to step up, but it’s not going to happen with the partisanship that has become the order of the day.  It’s hard to be optimistic about where this is taking us operationally.  I cannot trust either a Democratic or Republican congress to conceive, much less run an effective fiscal policy.  It’s going to take a move to balance by and between both parties which seems more and more elusive as time goes by [3].


But, as much as it pains me to say this, the biggest immediate problem may very well be the President.  Donald Trump deserves a tremendous amount of credit for the current condition of the economy.  No traditional politician of either party could have ever pulled off the degree of success he has achieved in deregulating business and tax policy changes which have super-charged our economy as never before, all without creating much in the way of unintended negative consequences.  But at the same time, no president has ever been his own enemy, and ultimately a potential impediment to continued economic progress as this one.  The Federal Reserve answers to the congress for results but has to be a completely independent entity in its policy setting and implementation.  The President jawboning them in one direction or the other would not be appropriate if he had a PhD in economics.  And he is not an economist.  Reverting to the previous discussion, the congress has a role in fiscal policy but so long as they are not doing their own job, it’s difficult to see them playing a positive or informative role for the Fed’s side of things.  But the President’s role is to appoint qualified people to the Federal Reserve Board, and then to LET THEM DO THEIR JOB. 


I said I wasn’t going to pontificate and then proceeded to do just that.  Well, rattlesnakes bite, dogs bark, and I talk.  That’s just who we are.  But back to the chartists’ analyses.


Actually, and I think this is the most prudent take away if not the most likely outcome, all three of these analyses may be correct.  They are not mutually exclusive insofar as potential outcomes are concerned.  Cramer’s commentary is probably the most useful in the sense that he has a pretty substantial following among individuals and institutional investors, and his is the most user-friendly for the average investor. To the extent that he tamps down the animal spirits, he is supporting the long-term health of the bull market. 


You see, corrections in the midst of a bull market are only a bad thing for investors who get too greedy, or traders who get caught going the wrong way.  And you are neither!


A bull market is a living, breathing organism, and like any other organism, if it gets caught going too fast for too long, overheating and over-reaching, it’s only a matter of time before it has to take a break.  One of the things that can bring down a bull market, in fact this is what happened in 2000, is for it to go too long without an effective correction, to the point that all investors were all in, and there was no one to break the fall when the cash for new investments ran out; no fuel to sustain the flame.  We’ve had a couple of healthy (and quick) corrections in the past few months so there’s no need for one right now, IMHO, but neither would it necessarily be all that bad if one were to occur.


Our take away is the same one I always try to guide you towards.  I’ve been laughed at for “always saying the same thing”, but there’s something to be said for consistency, especially in asset management.  It has served me well for 30 years as a manager of other people’s money.  So here it is:


There’s always a correction out there somewhere, perhaps even imminently.  And there’s also a bear market lurking.  But no one can consistently, accurately predict the timing or the magnitude of these events, and for the disciplined long-term investor they really don’t matter.  Don’t get overwrought in your expectations, certainly don’t change your investment parameters or processes unless your situation or circumstances change.  Review those goals, parameters and processes from time to time to make sure they are all in proper sync with one another.  And sit back and take the long-term positive results the market has historically provided for those of us disciplined enough to ride it out.

[1] Some inflation is a good thing, and one of the frustrations of the federal reserve currently is the difficulty in creating some beneficial inflation.  Go figure.

[2]  This is another newsletter in the making … I have been talking for years about the risk to the bond market of a sudden turn in interest rates.  I have been wrong so far, and I am coming to the viewpoint that perhaps the danger is not as great as I once thought it to be.  Another discussion for another day.

[3] One could surmise that only a catastrophe will provide the catalyst to overcome this problem, but we had the catastrophe in 2007 to 2009, and today they are still bickering, not only between the parties, but within the parties as to what was an appropriate response, and which parts of the response were warranted, which were appropriate in a democratic/capitalist society and what remedies for the underlying problems should or should not have been taken.

The opinions expressed are those of the author and do not necessarily represent the views of LPL Financial.  This article is not intended to provide investment advice.  The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Past performance does not guarantee future results.