August 17, 2022
Good morning,
It is rare, using the Technical/Quantitative Methodology (TQM) of market analysis, that every indicator across all four fields of analysis – macroeconomic, fundamental, technical and behavioral (sentiment) – align perfectly. Hence, the weight-of-the-evidence approach. Conflicting information is a feature of TQM, not a bug or shortfall. However, rarely has the juxtaposition between the fields of indicators been so stark. Macroeconomic and fundamental data suggest that conditions will worsen for the economy and corporate profits. Meanwhile, technical indicators are acting like the early stages of a cyclical bull market, while sentiment gauges are suggesting the extreme pessimism of late June has not been relieved (except from a very short-term perspective).
The weight of the evidence is neutral – macro and fundamental are offset by technical and behavioral. This is the reason for last week’s neutral-weight allocation shift from underweight. With additional signs from intermediate-term technical indicators and/or signs that macro/fundamental conditions are improving, an upgrade in equity allocation would be justified. Likewise, if expectations for a 2023 recession grow into year-end and the Fed cannot orchestrate the historically unlikely soft landing, then the allocation downgrade from neutral weight to underweight will return.
Be well,
Mike