INSIGHTS
MAY
20
WEEK AHEAD...
Lotto fever is over. We didn’t win. Now we go back to trying to figure out where this market is heading and why.
The market rally has been strong and unwavering and as each detractor has fallen by the wayside, more people believe in the strength and breadth of this particular bull-market. We have been in the bullish camp for some time but we are feeling a little more cautious. As we have noted several times before, US Equities have been the beneficiary of several things: An accommodating Fed, improving metrics in the US Economy and most importantly, no better place for investors money.
We also felt that the Dow would reach 15,700 or so. We are almost there and the question is: What do we do now?
Many analysts have been talking about “rotation of stocks” and yes, we definitely have seen money being moved from one sector to another but the fact remains, rotation isn’t responsible for a 14% move in the Dow this year and a 145% move from the lows in 2009. What has caused this four-year bull market? Simple. Money moving out of other asset classes and into stocks. There is nothing complicated about this. Money moves to the place of best return with the risks accepted because the previous investment yielded little or no return. As the US economy improved, confidence in it as a place to put cash improved and the best place to put cash during these last four years has been US equities.
These inflows of fresh money were the foundation of this rally
The money first went into high yielding, dividend paying stocks and then into financials, healthcare and technology stocks. These investors have been rewarded with a strong, bull market that has yet to see everyone “all in”.
With that being said, you would think we would be more optimistic and continue our bullish commentary. However, while we do believe long term (six months and longer) that the market will go higher, we are not going to sing that song right now.
We have been keeping tabs on inflows to stock funds and we see it softening a bit. If there is no new money coming into the market, the market cannot go higher. You rotate money out of one sector that sector suffers and no matter which sector it is put into, the market indices won’t change.
This is not to say that we are in a fully invested economy, we are not, but we do believe at these levels the market will take a rest. Probably trade in this range for three months or so and then resume going higher.
Does that mean we see a correction coming? Not a true correction but there will be some churning for a short period and as the Fed winds down its free spending ways, we will see a small correction.
This promises to be a week of little data so there should be little drama as well. Fed Chairman Bernake goes to Capital Hill to testify and we don’t expect him to say anything to disrupt the markets.
The main thrust will be housing numbers, which should show a little improvement and jobless claims on Thursday. We do think that those numbers will get better.
Home Depot (HD) and Lowe’s Companies (LOW) report earnings and those numbers will be subdued but we feel their guidance will be better.
One additional note: Several different gauges of investor pessimism are at their all-time lows. This puts another note of caution in our opinion about short-term market movement. When individual investors feel more optimistic about market conditions we are usually near the end of a market move, not the beginning or middle.
The market rally has been strong and unwavering and as each detractor has fallen by the wayside, more people believe in the strength and breadth of this particular bull-market. We have been in the bullish camp for some time but we are feeling a little more cautious. As we have noted several times before, US Equities have been the beneficiary of several things: An accommodating Fed, improving metrics in the US Economy and most importantly, no better place for investors money.
We also felt that the Dow would reach 15,700 or so. We are almost there and the question is: What do we do now?
Many analysts have been talking about “rotation of stocks” and yes, we definitely have seen money being moved from one sector to another but the fact remains, rotation isn’t responsible for a 14% move in the Dow this year and a 145% move from the lows in 2009. What has caused this four-year bull market? Simple. Money moving out of other asset classes and into stocks. There is nothing complicated about this. Money moves to the place of best return with the risks accepted because the previous investment yielded little or no return. As the US economy improved, confidence in it as a place to put cash improved and the best place to put cash during these last four years has been US equities.
These inflows of fresh money were the foundation of this rally
The money first went into high yielding, dividend paying stocks and then into financials, healthcare and technology stocks. These investors have been rewarded with a strong, bull market that has yet to see everyone “all in”.
With that being said, you would think we would be more optimistic and continue our bullish commentary. However, while we do believe long term (six months and longer) that the market will go higher, we are not going to sing that song right now.
We have been keeping tabs on inflows to stock funds and we see it softening a bit. If there is no new money coming into the market, the market cannot go higher. You rotate money out of one sector that sector suffers and no matter which sector it is put into, the market indices won’t change.
This is not to say that we are in a fully invested economy, we are not, but we do believe at these levels the market will take a rest. Probably trade in this range for three months or so and then resume going higher.
Does that mean we see a correction coming? Not a true correction but there will be some churning for a short period and as the Fed winds down its free spending ways, we will see a small correction.
This promises to be a week of little data so there should be little drama as well. Fed Chairman Bernake goes to Capital Hill to testify and we don’t expect him to say anything to disrupt the markets.
The main thrust will be housing numbers, which should show a little improvement and jobless claims on Thursday. We do think that those numbers will get better.
Home Depot (HD) and Lowe’s Companies (LOW) report earnings and those numbers will be subdued but we feel their guidance will be better.
One additional note: Several different gauges of investor pessimism are at their all-time lows. This puts another note of caution in our opinion about short-term market movement. When individual investors feel more optimistic about market conditions we are usually near the end of a market move, not the beginning or middle.