An Asset Allocation Discipline for an Abnormal Time

I'm sure I won't get any debate when I say that these are very abnormal times.  In fact, it has definitely been abnormal since at least the events of 2008, and maybe even since those early days of the 2000's.  The abnormalities grew as those wonderful credit default swaps came into existence, and of course, we can't forget the wonders of the Technology Revolution that escalated the algorithms that pushed derivative hedging through the roof.  So, like it or not, we live in an abnormal time.

Luckily we had Bernanke and Paulsen in 2008 (don't throw darts please), which even though being widely disparaged now, kept the deleveraging from producing a 1929-like situation.  I don't think any phrase describes this period any better than how Warren Buffett once put it: "When the tide goes out, the skinny dippers get exposed." 

As you can see in the next chart from, the stock market was on the same pattern as existed in 1929, but the liquidity that was orchestrated by Bernanke and Paulsen provided the necessary life-saver that resuscitated the S&P 500 back to a more normal (severe, but still like other "normal" bear markets) pattern.

Click on the image above to view a larger chart.  Click here to view the source.

You can see the rebound that has occured since that 2009 low, and the resulting corrections of this year and last year, now has the S&P 500 sitting on almost an exact replica of the rebound from the 2000-2002 bear market, and not far under the rebound from that big bear in 1974.  In both cases, this similar pause to today's level led to big gains in the ensuing years.

But today, what do we have?  While our International Market Trend Analyzer (MTA) moved into what we call the "Trading Phase" (click here to learn more about the MTA) last week (read Mark's post here), our MTA for the US markets is telling us to continue to trust the combined message from our Monetary, Psychology and Valuation composites, which you can see in Monday's post here.

So we continue to have faith that this bull market is still alive, and that is our message for today - a discipline for an abnormal time.

Don Hays

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