The Current Market Environment and the Unknowable Future

The Current Market Environment and the Unknowable Future

Since the market put in its bottom in the winter of 2016, the markets have performed quite well. But as market upswings mature, segments of the market get overheated and excess optimism usually results. Several trends have emerged in the last 18 months…A lot of money has gone into big-cap growth stocks (the fang stocks). And there has been a ground swell towards passive investing via ETF’s. Big institutions need to have investing vehicles that can absorb all their buying. Big cap growth stocks and passive ETF’s fill the bill. The only problem with that is, once market prices go the other way, they all try to leave by the same door at once causing prices to plummet. Another thing that has occurred is a bottoming and rebound of the commodity sector. The difference is there is a scarcity of supply in the commodity arena, so it should be better able to absorb a lot of buying.

I evaluate the current market environment by tracking the momentum of breadth (advancing volume-declining volume) of the NYSE. Momentum (rate of change) is a leading market indicator and can give information about a market before prices actually turn. The market indexes are little more than a proxy for what all the index huggers (institutions) are doing. Index hugging is primarily caused by career risk in the investment industry. In other words…’we can all go down together but I can’t let them go up without me.’

Now as big as these institutions are; there are still other entities above them in the food chain of influence, money and power. Call them the ‘lords of the playing field’. They are I suppose that one percent or maybe even that one half of a percent that work and control the levers of the truly big money. I like to think that by tracking the momentum of the breadth of the market I can trace their steps and adjust my risk profile accordingly.

According to the breadth of the NYSE, the lords of the playing field have been slowly siphoning their money out of the market. Now I know we all face an unknowable future where more things can happen than will happen, so the only thing left to do is try to manage your risk and be aware of the potential dangers that are currently in this overheated but weakening market.