Where Could We Be Wrong?

As Pinnacle investors know, we are investing defensively right now due to our feeling that the business cycle is under severe pressure and that technical conditions have broken down. Taking a negative view of the current situation is not a bad thing -- it is actually what we are paid to do when we feel it is necessary. However, given that we have a mission of beating our benchmarks over time, it is nerve racking to stay materially off the benchmark, because there's always a chance we are incorrect.

Here are a few examples regarding where we could be wrong in our forecast:

Technical Patterns: Some market patterns are tracing out higher lows and highs after the waterfall decline we have experienced. These are typically positive patterns.

Sentiment: Sentiment has gotten pretty bearish, which is typically a contrary sign.

Economic data: While we think the weight of the evidence we follow on the business cycle is negative, there are some data points that give us pause. As an example, the last ISM series was better than expected.

Analysts: There are some analysts we read who are warming up to the markets right here.

Europe: Now that folks are questioning a breakup of the Euro, perhaps it's time to bet on its survival? Maybe prior dysfunction in Europe is a catalyst for a major proposal that markets discount as a positive.

Emerging Markets: They are slowing, but perhaps they're poised to cut rates and increase stimulus.

High Impact Events: Maybe the Fed has another round of juice that moves markets, much like it did last time.

At the moment, we continue to give the downtrend the benefit of the doubt, and the weight of the evidence regarding the business cycle is still heavily skewed in that direction. Therefore we will stay defensive until evidence builds that better days are ahead. But the reality of forecasting is that there's always room for error, so in all environments we must question where we could be wrong in our thesis.