posted on 12 February 2017
Markets Hit New Highs
Since the beginning of January, the markets have remained in a very low volatility sideways trading pattern as shown in the chart below.
However, this past week all three indices broke out to the upside with the Dow moving above 20,000 and the S&P 500 surging above the 2,300 mark.
Not surprisingly, the push this week has once again pushed markets back into extreme overbought conditions as we head into the weakest part of February as I noted previously:
As we enter into the statistically weak end of February, a bit of caution may be advisable. Particularly as noted by Mark Arbeter, CMT on Friday:
However, for now, there is little argument the bulls remain in charge.
As I noted last week, there are plenty of bullish supports currently that warrant keeping portfolios exposed to equity risk currently:
Of course, this current move reminds me much of the last stage of the previous bull market advance where we saw many of the same similarities.
Remain Long, But Remain Wary
For now, portfolios remain fully invested as the bullish mantra persists. How long the current "buying stampede" lasts is anyone's guess, but with the markets currently extremely deviated from their long-term averages, a correction of some degree should not be surprising.
One of the reasons I suspect we may be witnessing the final "melt-up" stage of the market is due to the rising global uncertainty regarding policy relative to the complacency in the financial markets. The chart below shows the Economic Policy Uncertainty Risk divided by the Volatility Index.
Each time these particular levels have been reached, it has been near the peak of the "exuberance phase" of a particular advance.
Of course, nothing says "exuberant" like the consumer confidence composite indicator which is currently registering its highest levels since 1999.
This chart simply confirms the all Street axiom that "Investors tend to buy the least at the bottom of the market, and the most at the tops."
Of course, it is not just me saying that. As BlackRock's CEO, Larry Fink, told Yahoo in an interview earlier this week:
That last point is something I noted on Thursday:
And lastly, this note by Gavekal Capital certainly suggests the bull market remains intact currently, but should not be taken for granted.
The problem with surging commodity prices is that it typically leads to an economic downturn, not necessarily a recession, that weighs on the outlook for stock prices. Given the recent surge in prices, and a likely inability to pass those increases along to consumers, a negative impact on the economy and earnings is certainly viable especially when combined with the effects of a stronger dollar.
But again, that is just what we are being wary of.
Portfolios remain long-biased, however, we have continued to maintain our hedges in interest rate sensitive investments to hedge portfolios in the event of a shift from "risk on" to "risk off" behavior by investors.
It will happen. Only a question of when.
Riddle Me This
When I was growing up I was a huge fan of the original Batman with Adam West. Yes, it was really bad acting and cheesy one-liners, but it was always fun to watch. As I was writing this missive, I received an email from a reader asking if this was a good time to put a 50% of his investable assets into the market.
It immediately reminded me of the Riddler when he would query Batman:
The chart below shows the difference between "dumb money," aka retail investors and "smart money," aka institutional investors.
Historically, the "dumb money" has a tendency to answer the Riddler's question incorrectly. Unfortunately, for individual investors, this triggers the release of the man-eating sharks as they are slowly lowered toward their doom.
In the series, this was the point where Robin would spout of one of his lines: "Holy Tuna Fish, Batman."
But in order to find out if the daring duo would escape their watery fate, you would have to wait until next week and tune into the show. Of course, it was always at the "Same Bat Time And Same Bat Channel."
With the markets pushing historic highs, volatility registering historic lows and deviations from long-term medians at extremes - exactly how are investors acting currently? Fearful or Greedy?
Riddle me that.
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