Courtesy of Sabrient Systems and Gradient Analytics
Market timing is tough duty. Even as stocks have risen inexorably and we all knew it couldn’t go up in a straight line, still picking tops is hard. You can be wrong for a long time, and either lose your shirt shorting the market, or miss out on big gains by staying out. Well, it appears that all those previous bullish catalysts are played out, at least for the moment, and the annual ritual of April pullbacks might be kicking in yet again.
Is it because of the April ritual or anticipation of “Sell in May and go away”? No, I think it is more due to the new type of news events we have been getting lately. Rather than the usual financial reports to which investors have grown immune focusing on EU debt, China growth, Federal budgets, municipal pensions, and corporate earnings, the “new” news is more in the form of military threats and terrorism here at home (like bombs and poison letters). In any case, it has caused investor paralysis and bulls have suddenly lost the mojo that they had apparently regained just last week. The technical breakout of the S&P 500 above its all-time highs has failed, and it is back to testing important support levels.
Still, the Fed’s QE3 liquidity spigot continues to flow, which has helped support equity prices and the housing recovery, albeit at a rate that leaves many unsatisfied. But this lengthy U.S. economic recovery cycle, with its low inflation and low borrowing costs, is allowing corporate earnings and revenues to grow while lending a stabilizing force to a fragile global economy. On the other hand, the hawks in the FOMC are taking a new tact of reverse-psychology to try to bring an early end to the doves’ bond-buying by asserting that QE3 hurts the masses, including those living on fixed income, while mainly making the rich richer. You might call it collateral damage.
This year’s rally has been led by defensive sectors: Healthcare, Utilities, and Consumer Goods, and even Telecom has made a recent surge. And this general investor conservatism is also reflected in the outperformance of developed markets over emerging markets and value over growth, and the popularity of dividend-paying blue chips.
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