Equity Complacency

In The Highstreet Group by John Bartoletta

Despite the S&P and NASDAQ touching new highs on Monday, we think the overall trend of volatility continues to provide very little clarity for market direction. In addition, the Dow Industrials are also trading just below their highs and while they could get to new highs, the lack of market breadth is working against it. The missing ingredient to an overall bullish forecast is the continued weakness in the transports and utilities, as well as many other major market groups that are in various correcting trends.

Few stocks have performed in-line with the indexes with many making moves that have been either dramatically higher or lower than the Index performance so far this year. The best performers have tended to be stocks of companies with the best fundamental developments for the period and we view these stocks as largely good holds as long as the underlying fundamentals continue to improve. However, we have a hard time purchasing such stocks after they have made big moves to the upside. We view the risk of possible change as being too high to chase the top-performing stocks unless a good risk-control strategy is also used as downside protection. Hedging the portfolio would be prudent, even sector related hedging to reduce overall portfolio exposure.

While we may see some strength in the S&P 500 in the near term, we regard this as a token move that will not be long-lasting, but may cause a bit of near-term excitement. On a side note, we are surprised at the number of bearish headlines we continue to read regarding the U.S. and world economic situations, and believe that by the time that news and opinion is widely recognized, it is already priced into the market. It’s when the news becomes too optimistic that we would become more worried, and that is not the case today with the steady stream of negative headlines we are seeing.

TRADING UPDATE: Remember, diminished or lack of global growth will eventually override generally bullish US fundamentals. This may contribute to increased headline volatility that is difficult (if not impossible) to anticipate as to when it may occur with either fundamental or technical analysis. We have stopped buying equities at this time. This market is being forced higher and we will move in unison with the rally. However, we remain cautious and will look for anything that could derail the current trend. We recently initiated, and subsequently added to, an equity hedge equivalent to 10% of the portfolio. This is a purely cautionary strategy given current market conditions. We continue to remain diligent in our research and will continually monitor the markets and report back as data becomes available.