Fitting the Skin to the Stock Market's Skeleton

Our entire methodology is based on playing the odds, based on 50 years of history.  But as we scientifically determine those odds, we see very definitely what history tells us is the expected pattern for the market based on the three pillars that support the infrastructure.  Then we start trying to guess the future based on what those pillars are saying.  We often refer to those pillars - Valuation, Monetary and Psychology - as the skeleton, the framework that the market has, and our job is to simply fit skin to that skeleton. 

If those pillars are forecasting a positive stock market for the future, we do our best to analyze what productivity enhancers are about to be strengthened, but if the skeleton is weak, we look for productivity destroyers that are eating away the healthy muscles and will make the completed body less able to work and play and live more efficiently.  Of course, like you, I have my own beliefs of what enhances and what destroys, but also like you, my beliefs are based on a life of "striving" - striving to find and encompass productivity enhancers into my mental, physical and spiritual lifestyle.  We love the illustration of what makes a success person (or successful business) below.

Of course, different opinions of how you develop those sides are what today's massive polarization is all about.  But we're all striving.  So when I see our Asset Allocation Model in the posture its in this week, I'm looking for something good.

This week our Monetary Composite has moved back to its most powerfull ranking of M1, which means that the Fed is doing, and will continue to do, whatever is necessary to keep the economy improving.  Furthermore, we continue to see our Valuation Composite at its best level, and in fact, the amazing factor is that today's stocks are still 21% undervalued, so yes, there will be corrections and flips and flops in the short and intermediate-term, but that will not stop the upward long-term advance.  Lastly, we have our Psychology Composite which recently fell to P3 (from P5 following the big advance in the stock market at the start of this year), and now this gauge isn't too far away from a very bullish P2.

As we continue to fit the skin to our skeleton, we do believe a short-term rally will probably ensue, but we still may have some more time before the real upside takes off.

Don Hays

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