What now for the Essayist?

Dénouement: n. the outcome or resolution
of a doubtful series of occurrences

En route to losing my job as chief  expector* of calamity, I’m reminded of nineteen seventy-two, another top like this one. Sixty-six had been the first time the Dow Industrials touched 1,000. After a setback it rallied back in sixty-eight before slipping off again. Then, in seventy-two, with the economy starting to get flaky, a final trip to a thousand before a bear market that would hold the Average well under that level for the next eleven years.

I was in my fourth year as a broker in ’72. Most of my clients were small business owners with a few bucks to speculate in stocks. I had them loaded with four or five big movers in the over-the-counter market (NASDAQ, now), and on margin. Our expectations, along with everyone else in the industry, were seriously high.

Top tick that year came right at the end of the year, and from January 1973 to August ’74 the blood ran in the streets. Meeting margin calls was grim, but the most painful thing was experiencing the destruction of our bullish convictions. Some of those stocks went to zero, but we just couldn’t give up. At some point, some time in 1974 we said, Sell now? We’re already down 80%!

After that, it was a long while before I could recommend stocks. I was paralyzed with fear in the fall of 1974, the best time to be buying. It was the beginning of a practical education in the art of making money in the market.

Today I use edges for making investment decisions. An edge is a combination of variables that, when present, tells the investor that one thing is more likely to happen than another. It is a probabilistic approach, the only sane way to deal with uncertainty.

The variables that matter to me today are just like they were in ’72: Lopsidedly bullish sentiment among investors, complacency in the face of a weakening economy, economists unanimously expecting the economy to accelerate, the highest valuations on record for stocks, with most of the gains in the S&P 500 Index this year accounted for by four big names: Apple, Amazon, Google, and Facebook, while more stocks are making new 52 week lows than highs. Meanwhile, both of the other Dow Averages, the Transportations and Utilities, are already headed down, diverging from the Industrials.

My edge today is to remain on the sidelines. If that is right, my long effort to argue the case for being in cash ends here. The next time I’ll have a compelling edge will be when, like 1974, all of the variables have reversed: The public has lost all its money and hates stocks, economists are predicting continued decline in the economy, and stocks are selling for the lowest prices and valuations in a hundred years. That’s when I’ll suggest that getting out of cash and into stocks is the thing to do. Not that anyone will believe me.

There won’t be much to discuss on the way to the buying edge, but I might post this chart, updating the “You are here” spot as it slides on down:

You are here



*Expector: dude who has been expecting something for a hell of a long time

No one should consider any part of this presentation as a recommendation to buy or sell any securities whatsoever.


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