Find out how. Let's Talk

How the Market Works

The Danger Zone

Posted by kdadmin on May 14th, 2015.

Three days ago, she burst into tears in the middle of a conversation. Nobody knows why. Yesterday, she spilled a cappuccino into her computer. With some emergency tech, she recovered. Today, she backed into my car. Luckily, I already had a repair appointment scheduled.

This pattern is known as The Danger Zone. Often, about five days before some big event, trip, move, migration, or kickoff, my wife starts having erratic accidents. Years ago she fell down the stairs and broke her toe, so this period is not to be trifled with.

As usual, the best way to overcome these issues is to put the fail safes in place that we previouslydeveloped. She uses a sippy cup (any jar with a lid) for all liquids. I move my car into the middle of the back lawn making it impossible for her to hit it. She is required to always hold the handrail when walking down the stairs. All tears simply get hugged out.

New Zealand Red Cross

My current goal is to be able to ship her off to Australia & New Zealand without first stopping at the local Emergency Room. We’ll see how it goes …

I tell you this because the stock market is no different. Right before some big event (i.e., a Fed meeting, the unemployment rate release, oil supply data, earnings season, or an ECB meeting) it becomes accident prone. It might move up with a big swing, then immediately back down. It might crater. It might launch into some unsustainable euphoria. It might experience extremely high volume or none at all.

The graph below shows you how all three sized based asset classes are down in the last month; large, mid AND small. The bond market wasn’t much better. In other words, there was no place to hide. Except cash. (source:

The Danger Zone

We are clearly in The Danger Zone for the stock market compared to recent years. We’re trading among all time highs, QE stimulus has stopped, the Federal Funds Rate is all but scheduled to increase, corporate profits are not accelerating at the previous rate, Europe’s economy is embroiled in unsustainable socialist policies, Russia has raised raised the diplomatic stakes, and, probably most alarming, the Fed Chairwoman indicated that equity values were too high.

For me, it’s this last statement that is most concerning. In my mind, this means that Chairwoman Yellen does not feel compelled to support the market at its current levels. In other words, if the market sustains a serious set back (down 10%), it is unlikely that she will feel compelled to step in and prop it back up. This is a departure from the Bernanke days.

So, what’s the take away? All of this validates our decision to stay on the sidelines, with high cash stakes, until there is a compelling reason to get back in. For more information about how to build a defensive investment portfolio, check out my video, Braveheart on Investment Theory


Minneapolis, MN | St. Croix, USVI
(763) 577-1900