Technically Speaking: Picking Up Pennies In Front Of A Steamroller

“I take my hat off that you are able to continue picking up pennies in front of a steamroller. Reading your newsletter, I scratch my head in amazement at your ability to increase your exposures in a market you admit is the most expensive ever.” – @mlevin999

That was a comment I got on Twitter following a recent newsletter where I discussed increasing our exposure concerning our short-term “buy signals.” To wit:

“The uptick in money flows did allow us to add some exposure to portfolios in holdings we had taken profits in with the previous ‘sell’ signal.”

I can understand the confusion when this past week I discussed the issue of “If everyone sees it, is it still a bubble?” 

“My confidence is rising quite rapidly that this is, in fact, becoming the fourth ‘real McCoy’ bubble of my investment career. The great bubbles can go on a long time and inflict a lot of pain, but at least I think we know now that we’re in one.” – Jeremy Grantham

How do you square a long-term “bearish” outlook on future returns with a short-term “bullish” bias?



As discussed in “There Is No Way, This Doesn’t End Badly,” virtually every measure of fundamental analysis suggests the markets are very expensive.

“10-year forward returns are below zero historically when the price-to-sales ratio is at 2x. There has never been a previous period with the ratio climbing to near 3x.”

Picking Up Pennies, Technically Speaking: Picking Up Pennies In Front Of A Steamroller

Whether it is Market Capitalization to GDP, CAPE, Tobin’s Q, or Price-to-Sales, the problem with all valuation measures is they are horrible market-timing indicators. As shown in the chart below, if you had gone to cash when the S&P first crossed into “expensive” territory greater than 23x CAPE, you would have missed most of the current bull market cycle. 

Picking Up Pennies, Technically Speaking: Picking Up Pennies In Front Of A Steamroller

Being doggedly attached to valuations and fundamentals can prove just as dangerous to long-term returns as getting caught in a bear market. While a bear market does indeed destroy capital, not participating in a bull market has an equal impact on ending results. 

An excellent example of the problem, shown below, with purely using fundamentals to manage a portfolio is the performance chart between “momentum” and “value” since 2009.

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