From P1 to P4, We Still Have Good News

Last week we had some very good news as we started to see the employment numbers improving.  Of course, we have the skeptics coming in with reasons why we go this "temporary" boost, but nevertheless, the stock market is cheering.

As you know, we believe from the depths of our hearts that nobody knows the future course of events, and the natural cycle works in our favor in that fear causes dramatic steps to rescue disasters and euphoria causes natural dampers of restricting access to funds necessary to fuel the excesses.  So, psychology is at the root of market cycles.  We've shown you many graphics of this cycle, such as the one below, but it never changes.

Source: Click here.

This statement has been reiterated by every legendary successful investor I have ever known or read about.  Bull markets are built on a "Wall of Worry," and bear markets occur when that emotional balance moves to that "pie in the sky" euphoria.  We've spent a career studying psychology, and as time goes on, we have continued to accumulate different methodologies to measure the type of fear that influences stock markets.

We never know the exact character of the upcoming news, but at the very least, we know which side of the aisle to look for clues.  Everyone remembers the sharp declines that we experienced in August of last year.  In fact, if you remember, we saw two days that knocked 4.78% and 6.66%, respectively, off the S&P 500.  Who is to say how severe that decline would have been IF we had not had all that computer trading to magnify the decline?  But true to form, the public trader was convinced that the real apocalypse that had been forecast had finally arrived, so their sentiment plunged into deep despair, which pushed our Psychology Composite to its strongest level of P1.

Today, however, we have our Psychology Composite at P4.  That is not bad, but it is saying on our scale of 0 to 100 that it has moved to the 39th percentile - close to the center, but still on the bottom side of the scale.  However, while our Psychology Composite has evolved since the high fear of August, our Monetary and Valuation Composites have remained in their strongest positions of M1 and V1.  Furthermore, our Market Trend Analyzer is still telling us loud and clear to keep trusting those three pillars of Psychology, Monetary, and Valuation to guide our tactical asset allocation, as you can see below.

Of course, you can continue to trust your emotional biased reading of the headlines, but we hope you won't.  Today, we have a strong dollar, a very uncertain European environment, and we have trillions of dollars of international money with nowhere to turn except the US.  As a result, you see this combination of a strong dollar and a strong Dow Jones Industrial Average in the chart below.

Click on the image above to view a larger chart.

The public investor is absolutely paralyzed still with the fear of the unknown.  Their emotions have them bound up, but the BIG MONEY is speaking.  This is not unusual, but it does create huge potential as the stark, scary conditions of today start to clear.

Mark Twain had a way with words when he said, "If you don't read the newspaper, you are uninformed.  If you do read the newspaper, you are misinformed."

Don Hays

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