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The mixed economic numbers we have been seeing lately—-higher than expected consumer confidence and home prices vs. lower than expected Chicago PMI—might be confusing to some. One number shows the economy improving while another shows the economy contracting. However, for investors this is actually good news as the data continues to confirm that we are in a Goldilocks economy, not too hot, not too cold. Things are getting better but not good enough for the Fed to discontinue Quantitative Easing. As long as the Fed has its foot on the gas and there is no fear of a European collapse, then stocks are the place to be. At some point the Fed will have to stop easing, when that happens they have the option of removing the bandaid right away or removing it slowly. Both options will hurt, it just becomes a question of how much.
There are still signs of concern, small caps and mid caps are underperforming larger, “safer” stocks. Treasury bonds have also been doing well. All of this could signal that we are near a top in the market.
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.
Short term the market is starting to look overbought again so our shorter term positions are in cash waiting for a sell off to be put back to work.