. . . The analogy between the stock market and poker has always been irresistible. Interestingly, the stock market increasingly resembles a low-stakes recreational game among friends and less the sort of ‘there goes the ranch’ game favored by cutthroat professionals. Recreational poker is frustrating, but ultimately profitable to the serious player. Recreational players come to play. They play every hand. They make long-odds bets. They are hard to read because fear of losing money is not a factor in the game. They can’t be bluffed. The serious player is a different animal, playing the odds, maximizing winnings on pat hands, and figuring that in the long run his superior abilities will prevail.

The stock market is dominated by institutional equity fund managers who are paid to own stocks. The decision to own stocks already has been made by the asset allocation committee, or by the individuals who bought the mutual fund. Like the recreational poker player, equity fund managers are there to play. It is not their money and they are far less worried about losing money than underperforming the market. Put it this way: Individuals in the ‘business of investing’ want to out-perform their peers. It’s a different kind of game. If the market is down 20%, and the equity professional is down 15%, he or she is ecstatic. If the market is up 20% and the equity professional is up 15%, he or she despondent. The growing dichotomy of purpose between the owners of the money, and the people managing the money, is little understood.

When individuals played a bigger role in the stock market, those great allies of the serious independent – fear and greed – came more frequently into play. Every couple of years there would be compelling bargains, or shorting opportunities. The market favored by institutions – the S&P 500 – is expensive by historical standards. But the institutions aren’t selling – as individuals might have done – because they have to be invested, and where else can they put all that money? . . .

Frederick E. “Shad” Rowe, Greenbrier Partners, Forbes (4/16/90)

Those comments were written in 1990 by my friend Shad Rowe, yet they are just as pertinent today as they were back then! Indeed, due to expensive valuations, lack of revenue/earnings growth, slow GDP, China, politics, etc., the stock market had been in a virtual stalemate paralysis until the middle of July, having crossed above/below “go” so many times the only way to make money was to erect a toll gate at “go” (think the game Monopoly). And no wonder, frustration has reigned through the first six months of the year. While Wall Street is fond of saying the trend is your friend, determining the trend has been difficult for most of 2015. Sure, if you owned the 25 stocks that have “worked” you are in a bull market. But, if you owned most other stocks, the investing experience has not been so good.

Another saying on the Street of Dreams is that a rising tide lifts all boats, and in bear markets vice versa. But this year, at least up until July, the equity markets have had many confusing cross currents and diverging group trends, leaving some boats rising and many falling. Normally, you can look at some of the broad-based indicators, group indices and discern a trend, but frustration and confusion have reigned there as well. When will all these frustrating, confusing crosscurrents be resolved into a clear cut trend? Well, we think that process has commenced. We warned back in early July that a period of contraction was arriving for the equity markets. We also opined that it would likely end between August 13th and the 18th (+/- 3 sessions). Close enough for government work, for it felt like the capitulation low came on August 24th. Since then, Andrew Adams and I have suggested that typically putting in a bottom is a “process,” not an “event.” To that point, so far we have chosen to temporarily ignore the Dow Theory “sell signal” occurring on August 25th on the belief that like the 1000-point intraday smash of the “flash crash” proved to be false, August 24th’s 1000-point dive will also prove to be a false signal. As stated ad nauseam, however, if those closing lows are violated by the Industrials and the Transports, we will have to reevaluate that strategy. To reiterate, the closing lows of August 25th for the D-J Industrial Average (INDU/16433.09) and the D-J Transportation Average (TRAN/8051.62) were 15666.44 and 7466.97, respectively. I would also note that it is called “Dow Theory,” not “Dow Law,” because it is open to interpretation. Verily, the interpretation of correct stock market strategy is an “art form” and not a science, as the folks from Long Term Capital Management found out!

So, we are encouraged about the potential that the bottoming process began with the capitulation low of August 24th, as I stated on CNBC that day. Back then, the S&P 500 (SPX/1961.05) was more compressed, at five standard deviations below its 50-DMA (see chart on the next page), than it was at the 1987 “crash low.” Subsequently, we believe we have been in a deceptive bottoming sequence. We have highlighted the reasons for that view over the past three weeks. We have also highlighted mutual funds we have bought over the past three weeks, as well as stocks for your consideration from our fundamental analysts that have their highest conviction levels. In Friday’s Morning Tack we reported that another piece of the potential bottoming process had fallen into place when the NYSE Bullish Percent (BP) registered a more offensive stance from its previous defensive stance. The news items driving the 2.07% weekly gain for the SPX, and prompting the NYSE BP reading, were: 1) the sense the Fed will not raise interest rates this week; 2) expected more stimulus in Japan today; 3) the employment numbers; 4) the perky NFIB business optimism index report; and 5) better economic data from the OECD.

This week the verdict of the equity markets will be determined by the Federal Reserve and its mid-week decision on interest rates. If last week’s rally is to be sustained, it will be important to see the stock market’s response to the Fed’s statement, no matter what the Fed’s decision. If the statement is not to raise rates, the market should rally. If they do raise rates, the market should shake it off and move higher. If not, then the verdict of the market will be for a longer bottoming process, confounding the managers of “someone else’s money.”

The call for this week: The stock market determines the relevance of the news by its price action, not the “outperform the peer” players. This morning the European refugee problems mount, Euro zone industrial product is stronger than expected, Kuwait and Iran cut crude oil prices on market share battle, and China has tepid economic data. So far, however, the markets are shaking all of this off with crude oil relatively flat (-0.22%) and the S&P 500 preopening futures better by nearly 5 points as I try to nurse a back injury to good health.


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