Week-End Reading: Stocks Bounce On Deteriorating Volume But Downtrend Still Intact

AAA-Bulls-Back-Weekend-052616

This past week, the markets rallied sharply from last week’s lows sending the “bulls” stampeding into the market with claims the market is back. To wit:

“Hold on to your hats, folks.

According to Andrew Adams, a market strategist at Raymond James, there exists a perfect mix of conditions that could send stocks on a ride up, up, and up.

In a note out Thursday, Adams noted that there was a significant shift of investors from the stock market to ‘safer’ assets. Eventually this move to the sidelines will have to change.

The problem is that Adams is incorrect about the “cash on the sidelines” theory. As Cliff Asness penned previously:

“Every time someone says, ‘There is a lot of cash on the sidelines,’ a tiny part of my soul dies. There are no sidelines. Those saying this seem to envision a seller of stocks moving her money to cash and awaiting a chance to return. But they always ignore that this seller sold to somebody, who presumably moved a precisely equal amount of cash off the sidelines.

Even though I’ve thrown people who use this phrase a lifeline, I believe that they really do think there are sidelines.

There aren’t. Like any equilibrium concept (a powerful way of thinking that is amazingly underused), there can be a sideline for any subset of investors, but someone else has to be doing the opposite.

Add us all up and there are no sidelines.”

Adams comment would also suggest that investors are sitting primarily in cash and bonds rather than equities. Again, they aren’t.

AAII-Allocation-Survey-041416

All that really happened last week, as shown in the chart below was an oversold bounce on deteriorating volume confined to an overall market downtrend.

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This isn’t a rally that should embolden investors to take on more riskbut rather considering “selling into it” as we head into the seasonally weak period of the year. 

But that’s just me.

One note though. The markets have not made a new high within the past year. What does history suggest happens next? 77% of the time it has evolved into a bear market. 

On second thought, maybe that should be you too.

Here is your reading list for the weekend.


CENTRAL BANKING


THE MARKET & ECONOMY


BEST 6 MINUTES YOU WILL SPEND

Gross Trying To Short Credit Against Instinct by John Gittelsohn via Bloomberg


INTERESTING READS


“The contrary investor is every human when he resigns momentarily from the herd and thinks for himself” – Archibald MacLeish

Questions, comments, suggestions – please email me.

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Lance Roberts

Lance Roberts is a Chief Portfolio Strategist/Economist for Clarity Financial. He is also the host of “The Lance Roberts Show” and Chief Editor of the “Real Investment Advice” website and author of “Real Investment Daily” blog and “Real Investment Report”. Follow Lance on Facebook, Twitter, and Linked-In

David Stockman's Contra Corner is the only place where mainstream delusions and cant about the Warfare State, the Bailout State, Bubble Finance and Beltway Banditry are ripped, refuted and rebuked. Subscribe now to receive David Stockman’s latest posts by email each day as well as his model portfolio, Lee Adler’s Daily Data Dive and David’s personally curated insights and analysis from leading contrarian thinkers.

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