The major indices are making the new highs we spoke about in our last commentary, but the underlying demand needed to sustain this rally is, so far, absent. When we speak of demand here, we are referring to several of our data sources that measure the strength of a trend based on many quantitative measures that have shown to be good predictors of a lasting rally. Could this demand suddenly appear and “catch up” to the rally? The answer to this is yes but it would be an unusual event. Our tendency, at this time, is to look for defensive stocks that are the most immune to an economic slowdown or negative event. Some of these industry groups include healthcare, utilities and real estate.
Gary has been writing this commentary for 20 years and is amazed he still finds things to say! Truth is, he is still fascinated with the dynamics of what makes the market do what it does. As has been mentioned several times before, it is human emotion that drives prices up or down. But even more specifically it is what makes people act. You might think something is going to happen but what will make you do something in response? Will this response be cautious or panic driven? Ironically, it is the times where investors act out of pure panic that are the most predictable. Of course, these times occur rarely and one must be thinking clearly and objectively during them to make the correct decisions. So, given this premise, it would be logical to assume that the hardest time to predict where prices are going is when investors are the most complacent, and this is indeed the case. This is what we are experiencing now. The number of investors who are concerned about a significant decline is at a very low level. At the same time, the level of people who are bullish about the future is not at an historically high level. This situation often leads to sharp moves that “wake “ investors up, usually to the downside. Given that we have had little evidence this rally will last long, we are cautious about the intermediate term.
Please call with any questions or concerns.
Gary and Dianne
This report is provided as a general market overview and should not be considered investment or tax advice or predictive of any future market performance.
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