The divergence of opinions about stock markets today is high.  Important voices are expressing strong and opposite views. The tension is palpable.

Of course, it’s necessary to have people with differing views, return requirements and risk tolerance, cash flow needs, policy limits and plans, and time frames to make a market.  Some of those differences explain some of the contrary expectations. But the intensity and severity of the differences is unusual.  That is the kind of tension the precedes an important move. Once the tension becomes consensus, the market will move decisively, up or down — which we do not know.

The uncertainty is high and that is a factor that suggests who should be taking risks and who should not at this moment.  Those who are nimble are better for the moment than those who are not.  Those who have time on their side are better for the moment than those who do not.  Those who can absorb losses with new capital  are better for the moment than those who cannot.

This partial screenshot from Bloomberg today exemplifies the divide between the optimists and pessimists today, and the wildly conflicting information.  It is about oil, but could just as well be opposing headlines about stock values and price direction.

Conflicting Headlines

It’s really difficult to have conviction about the direction of markets when headlines like these abound.

Oil and copper are both giving favorable signs of a base.

Encouraging Commodities

However, contrary to the second Bloomberg headline, the chart suggests that equities have been following oil and copper more than the other way around.  Those two commodities showed some positive signs a couple of weeks before the current stock rally. However, if the IEA is right about falling oil demand, and if China fills their coffers with all the reserve copper they want, will oil and copper continue to rise in the short-term?

Commodities Leading Stocks

On balance, for investors who cannot afford to take significant losses, because they are relying on their portfolios for cash flow for living standards (or those who have irreplaceable assets, such as inheritances), this market is too uncertain to be a player right now. More consensus and a better trend confirmation is needed.

For investors who are still accumulating, who have other sources of income and years ahead before thinking about retirement, being in a risk position now is probably just fine.

To the extent that you are in between those kinds of situations, selective accumulation of financially solid equity income positions is a reasonable thing to do now — understanding that your positions could lose significant market value, but could continue to provide dividend cash flow while you wait for the eventual market price recovery.

Richard Shaw
QVM Group LLC

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