Lost in the daily angst is the fact that there are counterbalancing forces pushing and pulling stocks up and down. Yet, many investors often get consumed in the single-issue story and forget to take a step back and compile the pluses and minuses that tilt the market up and down.
To help frame the subject, applying a simple balance sheet approach to the market should help identify those factors that matter most and, thereby, put the current fear in perspective.
On the asset side of the ledger:
Low Redemptions, Net Cash Infusions
Moving Average Scorecard
On the liability side:
US Consumer Under Pressure
More Shoes to Drop
Unresolved issues include:
Pakistan, for example; Terrorism always
Investment Strategy Implications
It appears that we are now in the worst phase of the credit derivatives debacle. For this is the time, before the bean counters close the books and senior management has to sign on the personally liable line, when all that needs to be known will be revealed.
Interestingly, however, the big shoes are dropping but, beyond the very near term, the stocks aren’t. That should tell you something about the strength of the market and its near term direction.
Moreover, it’s also worth noting that the two ultimate measures of the market – valuation and the mega trend (as measured by the technicals) – are currently on the asset side of the ledger.
Finally, only if you believe in the deep recession scenario, which produces a substantial impact to the global growth story, as decoupling proves to be a myth, which in sum produces a large hit to corporate profits (>10%) should you choose to undervalue the asset side of our simple balance sheet. If, however, you are not in that camp, then fear should be tempered as there are many sectors and industries to stay invested in.