As we discussed in last Friday’s Financial Sense Newshour podcast, there are emerging signs of a global recovery based on leading economic indicators for China and 34 OECD countries.
However, as stated in our last update (see The Global Slowdown May Be Over), “though the fundamental picture has improved with global leading indicators and breadth measures, investor sentiment is currently stretched, which may result in a short-term pullback or consolidation.”
Current sentiment levels are still stretched when looking at put-to-call ratios so any unfavorable news (like today) was likely to result in a pullback from current levels.
The S&P 500 has spent 27 days above its 10-day simple moving average which would indicate it is due for a cool off. However, this same signal also indicates favorable returns for the index when looking out six to 12 months. Further, the relationship between cyclicals and defensives show a breakout in favor of cyclicals and the possibility of a continued risk-on phase once excessive optimism is reduced.
Based on long-term price momentum indicators like the Coppock Curve, raw industrial commodities, 10-Treasury yields, and oil prices are showing signs of a potential bottom in alignment with early global recovery.
A Bank of America/Merrill Lynch global fund manager survey has corroborated the idea that a fear of missing out (FOMO) on further gains has taken root among money managers. Cash levels declined from 5% to 4.2% continuing to fuel the purchase of market dips. This could eventually serve as a contrarian signal leading toward an important correction as cash levels drop, but for right now with underexposure to stocks this may fuel a continuation of the rally.
Our model regime has moved from neutral to slightly overweight equities with an increased exposure to international and cyclical investments given current macroeconomic developments. Further, we have decided to reduce our duration in all of the portfolios except for growth as we believe we are closer to the end than the beginning of this rate cutting cycle. Lastly, we have increased our risk appetite for credit and have obtained exposure in emerging market bonds.
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