Email Newsletter icon, E-mail Newsletter icon, Email List icon, E-mail List icon Enter Email For Newsletter Updates

11/12/2010 - Sentiment and Market Internals Suggest Correction or Consolidation


ARS_Logo.jpg


Equity Market Overview
We are likely at the leading edge of the first serious test of the market rally that began in late August.

The weekly sentiment survey from AAII has spiked to the highest levels of bulls (those expecting higher prices) in over three years. Such high levels of optimism historically have led to intermediate-term declines or extended sideways consolidations.

Similarly, Put/Call ratios and Rydex Cash Flow ratios both show that short-term measures of speculative enthusiasm are too high and also point to a market top or consolidation.

An intermediate-term market top is formed when a combination of high bullish sentiment, as exists today, coincides with poor market internals. Fortunately, market internals are decent.

The number of 52 Week New Highs has confirmed the market advance and shows strong institutional sponsorship to the rally. Similarly, the Advance/Decline confirms the market advance.

The only signs of internal market weakness are coming from short-term indicators. This suggests that any correction would be modest or that the speculative enthusiasm will be moderated by a sideways consolidation of recent gains.

In spite of the expected pause or correction, the international markets continue to significantly outperform the US market and their winning ways may continue despite US market conditions.


 

US Equity Markets (Equity Style Model)
Mid-cap Growth and Small-Cap Growth segments are most favored by our Domestic Equity Model. The performance of Small and Mid-Cap capitalization stocks shows a risk affinity by institutions. Further, the relative out-performance of growth stocks vs value stocks echoes the expectation for higher prices over the long-term.


 

International Equities
Top Country Recommendations:
ECH - Chile
EPU - Peru
EWM - Malaysia
GXG - Columbia
IDX - Indonesia
THD -Thailand
TUR - Turkey


 

Investment Grade Bonds
 We are long an equal mix of International and Domestic investment grade bonds. I must admit, however, that I cannot fathom any further gains in the bond market.

Though our models remain long for the time-being, the fiscal and monetary imprudence is so grave that inflationary pressures WILL ultimately prevail and be reflected in significantly lower bond prices.

Our government's reporting of low inflation is absolutely fictitious and contrived to ameliorate social security and other COLA'd obligations. The conflict of interest is obvious.

Social Security recipients should be petitioning for an independent non-governmental measure of actual inflation. The convoluted and illogical determination of the CPI is unconscionable.


 

High Yield Bonds
High Yield Bonds are on a BUY. I expect some slowing or retrenchment paralleling the general equity market.


 

Real Assets / Inflation Hedges
Our models are long Gold Bullion and REITS.


 

Currencies
We are equally long the Australian Dollar and Swiss Franc.

 

These reports express our opinions and suggestions, provided only as a supplement to your own further research and decisions. We take care to assure accuracy of contents but accuracy is not guaranteed. Past performance does not imply future results. The publisher shall have no liability of whatever nature in respect of any claim, damages, loss or expense arising out of or in connection with the reliance by you on the contents of our website, any promotion, published material, alert or update. ALL RIGHTS RESERVED.