The market continued to “melt up” this week. Everybody is expecting some sort of correction, but just like every time there is a consensus on something it never tends to happen. It is hard to envision the market having a massive continuation of this rally without some pullback, but we could easily continue to inch up for a while.
On the negative side there was a front page article in the Wall Street Journal this morning that individual investors are coming back into the market in droves. Any study you want to read will tell you that individual investors are typically the worst market timers, investing at highs and selling at lows. Time will tell if this trend continues.
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 have moved out of China and into broad based International Developed Stocks. Our shorter term counter-trend indicators still show that the market is highly overbought and hint that we could be in for some more consolidation before the next major move. This week we sold our counter-trend positions in US Dividend Paying Stocks and Small Cap Stocks. Our cash positions are now 25-50% 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 counter-trend Treasury Bond models indicated that the selloff in Treasuries might be a little over extended and due for a snap back causing us to initiate positions in our fixed income strategies. We understand that over the intermediate and long term Treasuries are probably the worst bet you can make, but over the short term they are looking oversold and could provide some protection if we do have any sort of pull back in stocks.
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