Which Future Scenario Best Fits the Stock Market Today?

We always attempt to develop a possible scenario to fit the message being provided by our Asset Allocation Model.  Then this morning, I read the commentary of my very perceptive friend Ed Yardeni (website link / blog link) who says that those investors who are analyzing today's news are painting four possible scenarios for the stock market.

  1. A New Bear Market
  2. A Nasty Correction
  3. Meandering, Then Higher
  4. Higher Now

Ed, who is very negative on the tactics of the government and the possibilities of politicians to fix the current mess, is still choosing the third scenario.  And if you have been reading our comments since the end of January (of this year), that is pretty much where we stand as well.  We rarely miss reading Ed's morning comments, and we don't think anyone is better at putting current news in context.  We also embrace his somewhat bullish bias, but our agreement this morning (or any morning) is based purely on our Asset Allocation Model discipline. 

Here's the message we're receiving from our discipline this morning.

Today's combination suggests that, yes, the next 3-6 months are somewhat of a toss-up, but the next one year, and the next 3-4 years, offer superior potential for stocks.  That is why we agree with Ed's third scenario, but we recognize that there have been many times in the past when rallies occur sooner rather than later when our Psychology Composite is the main "fly in the ointment" and Monetary and Valuation remain pretty bullish.

So this morning, we continue to be cautious in the short-term with Psychology at P5; yet, our discipline continues to suggest a fully-invested stance for the long-term.

Don Hays

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