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3/4/2011 - Equity Rally Looks Healthy


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Equity Market Overview
After a significant rally, the tendency is to start looking for its end. Admittedly, I've remained curious about the resiliency of this rally in the face of questionable market internals.

However, the most bullish thing the market can do is go up. And when it can go higher with growing skepticism, as evidenced by surveys of investor sentiment, then we have something. Since the beginning of the year the Investors Intelligence survey and AAII survey both show a waning level of bullishness (optimism) in spite of the higher price trend.

Typically, a market top will occur during periods of extreme bullish sentiment; NOT during a period of waning optimism and growing concern as we see today.

So what about the market internals? Well, the New Highs data still isn't as robust as I'd like but I can't argue with the Advance-Decline line constantly going to new highs.

Another encouraging sign is that the higher risk International regions are starting to out-perform the broad market again after nearly five months of almost going nowhere while US equities marched unceasingly higher. Leadership of higher risk assets is a strong clue about the positive disposition of institutional investors and bodes well for higher equity prices.

In summary, sentiment is showing growing skepticism which is a good sign for higher equity prices. Market breadth is solid and supportive of the intermediate-term trend. Finally, higher risk assets are resuming a leadership role which is supportive of higher prices. We'll see some short-term corrections but signs point to the intermediate-term uptrend continuing.


 

US Equity Markets (Equity Style Model)
 As noted in the Overview section, it's always important during a rally to see that higher risk assets are performing well. It shows an underlying proclivity to expose assets to risk and obviously suggests a positive outlook investors have for the future.

Today, the best performing style boxes are the Small-Cap and Mid-Cap Growth segments. These two are the top of the risk spectrum and their leaderships bodes extremely well for the market.


 

International Equities
 For over five months the international area has just stumbled along while domestic equities climbed higher. In recent weeks, however, fledgling strength is developing in international areas. It's too soon to say that the relative strength trend is once again favoring international stocks over domestic.

The following country ETFs are those top-ranked by our model:
EWA - Australia
EWG - Germany
EWJ - Japan
EWO - Austria
EWP - Spain
EWT - Taiwan
EWW - Mexico
RSX - Russia


 

Investment Grade Bonds
We are long International investment Grade Bonds. The renewed weakness in the US Dollar (and commensurate strength in foreign currencies) provides a nice tail wind to our position.


 

High Yield Bonds
We are long High Yield Bonds.


 

Real Assets / Inflation Hedges
Our models are long Commodities and REITs. The strength in Commodities usurped Gold Bullion as the latter experienced a shallow correction. The long-term uptrend in Gold Bullion is still intact, however, and I won't be surprised is the models, once again, look to Gold in the coming months.


 

Currencies
We are long the Australian Dollar.

 

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