This Week Did Stir Up Some Sand

Watch children dig into the sand at the beach. A wave washes over their hole. It stirs up the sand. Enough waves and the hole disappears.

As a kid, I'd try to keep digging. It was a battle royal between the waves and me. Why I did this, I can't say. I do remember, though, that if I really wanted to dig a hole or build some sort of castle in the sand, it made a lot of sense to dig where the waves couldn't reach you - at least for a while.

Ultimately, of course, high tide comes in and your castle becomes, well, just sand again.

Wouldn't it be great if we could invest away from the waves so that our money castle doesn't get eventually pulverized by market waves?

It's an endeavor that has been pursued by many a hearty investment genius. Some succeed - at least for a while. I've known and even worked with such folks - typically those running hedge funds. Years ago, one such gent ran a traditional long-short fund for a couple of decades. His average return exceeded the S&P most years without the downdrafts that the S&P brings with it. (Remember 2008?)

So he managed to get close enough to the waves to use the hearty wet sand to build his castles and somehow stay far enough away to avoid a total wash out. It was quite impressive.

These days, it's hard to find a hedge fund that even beats the S&P, never mind minimize it's volatility. I guess the geniuses are digging and building too close to the waves.

So where does all this beach sand stuff come from? Just this: the waves stirred up the sand this past week. No, it's not 2008 all over again (at least not yet). But it did seem to ruffle some financial feathers. 

The S&P's been down for a string of days. Normally we'd not pay too much attention, but the declines have accelerated. The acceleration has been pinned on what's going on between Israel and Iran. Maybe.

But whether that's the case or not, it remains true that the S&P is overvalued and looking for a reason to "correct" at minimum. That's just how things go - just like the constant waves along with low and high tide repeat and rinse endlessly.

Now, the past week brought us three of our top investment analyst reports all in the space of three days. We read through them. None are calling for a stock market crash. None have really changed much what they've been saying for months and months now. They each have a view and aren't making any about-faces. 

And the thing is, each has made such about-faces in the past when the changes in market action reached some point where their current view was obviously being challenged.

But wait. There was one exception. One our sources made note of two indexes or averages that we've followed for years. 

First, there's the Dow Transport Average. These in tandem with the Dow Industrial Average are the two wings of Dow Theory. There's a storied history to this Theory. And, for sure, you won't find one single interpreation all the time. On the other hand, there is the basic idea of a "non-confirmaiton" between the two averages. One hits a new high, the other doesn't confirm. Give this enough time and a persistent non-confirmation signals trouble. And it looks like we've gotten such a non-confirmation.

Second, there's a proprietary Index created years ago by the late, great Richard Russell. He call it his PTI - Primary Trend Index. He always said it was smarter than he was. And indeed, having followed Russell for many years, it sure did seem to work out that way.

Despite Russell's demise, his dear friends and professional colleagues "inherited" the PTI from Russell and have kept posting its results. And it sure has been a good reliable indicator to follow when investing in stocks. The PTI has been relentlessly bullish for as long as it's ever been, even in the teeth of various bouts of stock market drop over the last few years.

You may have guessed that the PTI turned down this past week. Time to lighten up on stocks? Could be.

Then again, if you play in the sand, you have to expect the waves to do their business at some point. If you've managed to build a beautiful castle, enjoy it while you can.