The market continues to defy gravity as we have broken through the September highs and are now charting new territory.
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 selloff. 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. This week we put some of our cash to work during slight downturns buying US Dividend Paying Stocks and Small Cap Stocks. Our cash positions are now 17-25% which will use to buy into any counter trend weakness .
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.
This week our Treasury Bond models diverged, one continued to be positive and the other went negative, causing us to sell our long positions.