What a difference a year makes. Last week’s mini decline would likely have snowballed into a longer steeper decline in the 2011 bear market but its 2012 and we’re undoubtedly in quite a strong bull market, where declines are short and quick.
But last weeks mini decline had a big effect on investor sentiment as many investors changed their tune flipping from overly bullish to bearish, hence we’ve reverted to a less defensive posture hoping the mini decline was enough to add fear back into the markets.
As of March 13th, Investors Intelligence had 43.6% of advisors they tracked in the bullish camp down from 54.8% on February 14th. This recent reading was the lowest since November 1st. The American Association of Individual Investors (AAII) in their weekly poll had the bullish contingent at 42.4% down
from 51.6% on February 10th.
The Dow, S&P 500, NASDAQ and Wilshire 5000 plus the Advance Decline line all made new highs this week. The laggard, curiously enough is the Russell 2000 which is trying to break through formidable resistance. I believe its a matter of time before this index breaks through to a new high as well
A popular investment trend over the past three years has been to lock in high dividends to offset the miniscule yields in bonds and money market funds. This trend can work well as long as interest rates are stable but with an expanding economy Treasury bonds are beginning to appear headed to a Bear Market. This is not unexpected but in fact was one of my 5 surprises for 2012. Interest rate sensitive mutual funds and stocks may be vulnerable now.
An interesting bit from Ned Davis Research is that the low volatility we’re experience now is likely a good thing. 2012 is only the 9th time since 1928 where the S&P 500 has started the year not experiencing a 1% decline in the first 40 days of trading. The average gain for the remainder of the year was 18.4%. There was only one March to December period with a loss, 1966.
US equity markets have been invigorated and we’re selling off our hedges into today’s upward move. What I perceived two weeks ago as a market rolling over, did indeed roll over…but only for a day. Most of our indicators are still pointing to a higher market so I prefer to take a two point loss on the TWM and let this market run its course.
Smaller cap stocks have showed renewed strength this week as I get the sense that investors are starting to finally believe in the economy. Notice the renewed weakness in the ten year Treasury bond. For investors holding the bulk of their assets in bonds or interest rate sensitive securities with the belief that risk is minimal, please think again:
Frequently I’m asked about new holdings: JBSS John B Sanfilippo is ranked at the top in our model. JBSS is a processor of nuts and owner of the Fisher Nuts brand. The stock sells below book value of $18. Price to sales is a staggering .22%. We’ve been buying in the $10 to $11 range.
Long JBSS
My constant theme for about a month has been to lower risk in the face of high investor expectations and the S&P 500 index up against overhead resistance. Markets have done well since the turn last November but the odds of the rally continuing appear to be dimming. I’ve been consistently selling our laggard holdings to raise cash but now we have to take the next step in increasing our defensive posture.
The cap ETF symbol IWM is beginning to roll over. Frequently this is an early warning indicator and can move in advance of the larger cap S&P 500.
Possible reasons for this include:
Lowered GDP expectations for the 1q 2012 by Bank of America to 1.8%.
The ISI survey shows a dip in retail activity.
Rise in oil prices which continue combined with the increasing tensions with Iran.
The rise in oil can potentially put a lid on equity prices.
Markets have had a nice run but the lack of momentum has me concerned that even if the S&P 500 breaks to the upside, the breakout could be temporary and not the start of a major move. No matter, the IWM which is a surrogate for small cap stocks is clearly in retreat. For these reasons we’ve added the TWM at just over $32 as a hedge against our remaining stocks.
If you look closely you can see the price of TWM is starting to curl higher which would correspond inversely to a move lower in small cap stocks.
Long TWM
We’ve continued to reduce our equity exposure this morning selling off our holding in Cedar Fair LP. My concern is that the stock market is back at resistance levels at 1360 on the SPX. I think its really just a matter of time before this level is taken out but it may not be until after a pullback. In the meantime Gold and Oil are perking up and that does not bode well for equities. How long can the market be in denial? Impossible to say but $105 oil has to get attention sooner or later.
Long GLD
I’ve been neutral on Gold after its parabolic rise last year but the charts now look quite attractive to me. The correlation between deficit spending of world governments and the price of gold is quite tight and now it appears a new leg up in gold could be forming.
Long GLD
Markets have risen sharply since December and while the economy continues to improve there are several issues that have me concerned about the near term market direction:
Investors have become increasingly and probably extremely bullish. Market sentiment back in November and December was as dismal as any time in recent years but investors have turned around and bullish levels are nearing extremes.
Republicans continue to spread a confusing and often times a medieval message (who’d ever think the Crusades would have been a talking point?) as talking head topics have shifted from economic solutions to social issues. A Romney victory in November would likely have been viewed as a significant positive for equities but his primary message has not materialized. The longer the tug of war continues between Newt, Romney, Paul and Santorum the odds grow for an Obama victory. The Presidents poll numbers continue to improve along with the economy which favor an incumbent win.
Broadening turmoil in the Mideast and the price of oil which just reached $105.
Market cycle projections show market weakness beginning soon and lasting into early Summer before a significant rally materializes.
For these reasons I have begun culling dead-money stocks from our portfolios. While there is little evidence to suggest a market correction is imminent, the ingredients for a future pullback are beginning to materialize. But in the meantime investors remain very bullish, hence we’re taking a more cautious approach.
