After a big rally to start the year the market hasn’t done much. That is to be expected as markets often pause to catch their breath after large
moves. The S&P 500 is bumping up against important resistance in the 1470 area. Previous rallies in September and October tried to break through this level and failed.
Our momentum indicators are still extremely bullish on the stock market. Our positive reading on stocks does not mean that the market is guaranteed to rise from here. There are still many risks on the horizon (Poor corporate earnings, problems in Europe, slowing economy, partisan bickering in Washington, etc) that could cause a sell-off. However, our research suggests that when our momentum indicators are bullish the rewards of being invested outweigh the risks.
In the US we continue to see the most strength in Mid-Cap stocks, with Small Caps second. Globally, we see the most strength in China. Our shorter term counter-trend indicators still show that the market is slightly overbought and hint that we could be in for some more consolidation before the next major move. We have been sitting 25-65% cash positions waiting for our counter trend indicators to turn positive.
On the S&P 500 we see support levels around 1450 on the downside. On the upside we look ready to take out the September intra-day high but it probably won’t be easy.
Fixed Income Markets
Our momentum indicators show the most strength in higher yielding areas of the bond market, particularly High Yield Corporate Bonds and Emerging Market Bonds. Low interest rates continue to force yield seeking investors into the “riskier” areas of the bond market. We fully understand that a lot of this momentum is an artificially created bubble created by the Fed’s low interest rate policy. However, in an improving economic environment investors are more willing to take risk in the bond market. Also, being tactical we are always ready to shift out of higher yielding bonds if the “bond bubble” bursts.
Interestingly, Treasury Bonds have been strong this week. At this point it looks more like an oversold rally than a shift back into Treasuries and out of stocks.
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