Well, my annual family vacation at the beach is coming to an end and soon I will be winging my way back to Houston. While I do love taking time out of my normally busy schedule to focus on those that I most adore, it is always comforting to return home.

I wanted to update a couple of points from last week as we continue to manage risk in portfolios.

While the markets have indeed broken out to new highs, as I addressed earlier this week, it has done so without a significant improvement in the fundamentals. However, the breakout, such as it is, should not be dismissed or ignored.The technical underpinnings have improved enough to warrant an increase in equity related exposure given a proper entry point in the days or weeks ahead. Such an entry point would require a relaxation of the extreme short-term overbought conditions that currently exist. But a violation of critical support would negate the breakout and return the market back to a more bearish posture.

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The potential for such a pullback is extremely high. As Tom McClellan noted recently, the “14-day Choppiness Index,”which tracks the path of a short-term trend, suggests Wall Street’s “uptrend is getting tired.” As McClellan notes, the very linear path for the index implies that the trend is likely to come to an end soon, while more volatile, or choppy, action suggests the opposite. A low reading in McClellan’s index signals a fairly straight-line, or linear, move. And presently, his choppiness index is at its lowest level in two decades.

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“The reading on Monday was the lowest since Feb. 12, 1996 (yes I scrolled all the way back that far to find a lower one). And in case you are interested, that 1996 instance marked a price top which was not exceeded until 3 months afterward. Linear trends either upward or downward are very exhausting, requiring a lot of energy from either the bulls or the bears to keep everyone in formation and marching together. The market tends toward entropy, so excursions like this toward extreme organization cannot last for very long.”

Furthermore, with volatility levels at extremely low levels the probability of a further advance, without a pullback first, is extremely limited. My friend, Salil Mehta made a great comment on this recently noting that at current levels of volatility there is only about a 20% probability of further declines.

“At 11 [in the VIX] you are really close to the floor. chances are higher that you won’t go lower on VIX and will instead pop up on some risk-off day,”

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As I stated in last week’s missive, the safest course of action for those more “bullishly” inclined is to wait for a pullback in prices to further increase equity allocations in portfolios. However, as I also noted, the current setup is extremely weak and the potential for a sharp pullback in August/September could quickly extinguish the bullish exuberance.

Caution remains highly advised.

Here is what I will be reading on the way back home.

Interesting Stuff

• Could France Be Facing A Civil War by Jonathon Miller via CNBC
• The Rise Of Zero Sum Economics by Sandwichman via Econospeak
• Credit Risks Are Rising by Rupert Hargreaves via Value Walk
• Why Oil Prices Might Never Recover by Arthur Berman via OilPrice.com
• Unburdening The Facebook Generation by Mohamed El-Erian via Project Syndicate
• $15 Minimum Wage, No Cashiers by Panos Mourdoukoutas via Forbes
• Land & Homes Are Lousy Investments by Robert Shiller via NY Times
• Yield Curve Deniers Prepare To Do Battle by Caroline Baum via MarketWatch
• Trump Vs. Clinton On Economic Issues by Paul Davidson via USA Today
• The Fed’s Cuban Connection by Mary Tao via Liberty Street Economics
• Helicopter Money Is No Bazooka by James Hamilton via Econobrowser
• Fed Mission Accomplished, Why No Change by Conor Sen via Bloomberg

Markets

• The Dow Will Need To Hit 150,000 by Chuck Jaffe via MarketWatch
• Why Stocks Have Been So Resiliant by Anora Mahmydova via MarketWatch
• Is This Bull Market Just Starting by Shawn Langlois via MarketWatch
• Throwing Shade At New Market Highs by Anthony Mirhaydari via Fiscal Times
• Thank D.C. For Stock Market Rise by Jonathan Aberman via Washington Post
• Is Fed Fueling Fear In The Markets by Jonathon Trugman via New York Post
• Equities, The Only Game In Town by Buttonwood via The Economist
• Bull Market Blues? by Paul Krugman via NY Times
• Companies Sitting On $75 Trillion Bomb by Jeff Cox via CNBC
• Bull Trap Still In Play by Adam Koos via MarketWatch
• 3 Reasons To Worry About End Of Advance by Michael Kahn via Barron’s
• Light Bulb Moment For Explaining Market by Science Daily

Always Good To Read

• Beware Of Junk Yard Dogs by Danielle DiMartino-Booth
• Lies, Damn Lies & Valuation Statistics by Jeffrey Snider via Alhambra Partners
• What Will It Take To Worry Investors by Tyler Durden via Zero Hedge
• Why The Fed Can’t & Shouldn’t Raise Rates by Tim Duy via Bloomberg
• Stocks Will Complete A Full Cycle by John Hussman via Hussman Funds
• BIS Reveals Biggests Risk To Global Economy by by John Mauldin via Tumblr
• 10 Things I Think I Think by Macro Man
• Monetary Cocaine & The Market by David Stockman via Contra Corner
• Stock Streak Hits Rarefied Air by Dana Lyons via Tumblr
• Never Been A Better Time To Be An Active Investor by Jesse Felder via The Felder Report