4/15/2011 - Long-term outlook bullish but consolidation likely
- Categorized in: NEWSLETTERS
My long-term outlook for the market remains positive. The nearer term outlook suggests a modest correction or continued consolidation.
One gauge of investor sentiment published by Investors Intelligence suggests that investors have become overly optimistic. Present levels of investor sentiment have occurred near intermediate-term market peaks and periods preceding consolidations/congestion. The AAII Sentiment Survey is the other weekly survey that I review regularly. It, too, is elevated but not to the same extreme. Intermediate-term sentiment measures suggest caution.
Market internals, however, are quite robust. The Advance/Decline line is moving higher in concert with the broad market averages. That defines a healthy market. Historically, a significant divergence between prices and a lagging A/D line occurs before a major market top.
Additionally, I have seen great improvement in the number of 52 Week New Highs. During several periods of the rally the number of new highs was lagging the market advance and gave me pause. However, at the most recent price peak in the market averages earlier this month we saw a commensurate increase in New Highs. This also illustrates that the market is internally healthy and that prices will ultimately resolve to the upside.
So what is the likely outcome of over-optimism yet strong market internals? Two scenarios: 1) A short or intermediate term correction that takes the broad market down 5-7% or 2) A continued consolidation of prices that appears to have begun earlier this month. Either of these outcomes would quell the over-enthusiasm.
In summary, I think any price weakness that occurs over the period of several days to a week will represent an excellent buying opportunity should it occur. Should the broad market indexes be able to better their respective highs from earlier this month it would signal a continuation of the rally and also signal a buying opportunity. In other words, treat the market as bullish by buying weakness and signals of rally continuations.
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.
I am transitioning away from the country-based International Equities model introduced last August. It's predecessor, the Regional model, has better performance with less portfolio turnover. Over the coming weeks/months I will complete the move back to the Regional model that had been used successfully since the inception of the firm and has continued to perform well.
The Regional model is long Asia, Emerging Markets and Europe.
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.
We are long High Yield Bonds.
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.
We are long the Swiss Franc.
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