5/29/2009 "Wall of Worry" Sentiment Indicates Rally Will Extend
- Categorized in: NEWSLETTERS
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In the last newsletter, I indicated that we need to be mindful of a shift to excessive bullishness as that would be a warning. However, this week's sentiment data, as well as that of the entire rally, continues to illustrate worry and skepticism about the sustainability of the current rally. This "Wall of Worry" phenomenon is common early in bull markets. International markets have moved into a long-term BUY mode being helped by US Dollar weakness (which translates into currency gains for US investors) coupled with superior fundamentals.
Domestic markets remain on a long-term SELL on a trend basis. Each passing day the markets can hold or improve upon current levels brings us closer to a BUY signal, however.
The technical condition of the market is healthy. Earlier this month the equity markets became very overbought but the consolidation of the past few weeks has cleared that condition and has set up the probability that equities will punch through to higher highs in the weeks ahead.
Asia, LatAm and Emerging market regions are top-ranked by our model. Emerging Markets are on a BUY with Asia and LatAm close behind. ASIA (ex-Japan) - EMERGING MARKETS - EURO - JAPAN - LATIN AMERICA (LatAm) - USA -
Our primary equity model remains defensive. Historically, when it has avoided substantial rallies such as the present one from March it has been because the rally was a bear market rally (a temporary rally within an ongoing bear market decline). This suggests the possibility that the March lows may be revisited or, if the bear market low did occur in March, that there might be some loss of recent gains before the bull market reasserts itself. Such a situation occurred early in 2003 as the market came close to re-testing its October 2002 lows at the beginning of the previous bull market. The other possibility, a more optimistic one in some ways, is that the International Regions will again be the bull market leaders leaving the US behind reflecting the current woes of the banking system and credit markets.
High Grade Corporate and International Bonds remain on a BUY. We favor International Bonds due to US Dollar weakness which translates into currency gains for non-US holdings.
Our model is on a BUY for domestic high yield bonds. GOLD Bullion - (GLD) - On a BUY Goldman Sachs Commodity Index (GSG) (largely energy ) and DB Commodity Index Tracking Fund (DBC) on a SELL . Any continued strength in oil, which is heavily weighted in this fund, could see a flip to a BUY signal. Real Estate - Our models rank REITs as a BUY due to underlying strength in the equity markets. I was recently asked at a presentation I made if my recommendation for REITs heralded a turnaround for real estate. It does not. I think the fundamental situation for real estate is poor and overhead supply and demographics will insure that a very lackluster condition exists for decades. The current BUY signal is momentum based and simply reflects a rally from a very oversold condition. I don't expect REITs to be a leading area and expect that they will be supplanted by commodity ETFs like DBC and GSG in the weeks or months ahead. 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. |