As the temptation for the retail investor grows to want to come running into these markets with the bulk of their capital, with the averages reaching new heights each day, the concern levels should actually be rising — and caution may be a good thing (more on this below).
Looking at today’s themes, we were seeing the recent weak Japanese yen continue to push names like Toyota Motor (TM) and Tiffany & Co. (TIF) higher. Those companies are main beneficiaries from the recent currency debasing strategies we are seeing in Japan. Elsewhere, commodity plays in the gold and oil space were getting hit hard as commodity prices retreated once again. Some of the names down on that news included Exxon Mobil (XOM) and Chevron (CVX). Finally, Gap Inc. (GPS) shares jumped higher on news of solid same-store sales numbers.
I keep getting asked when the inevitable sell-off will happen. Money is building up, and investors who have been out of the markets are clamoring to throw money in droves into stocks. Here’s the problem with this strategy: when sell-offs happen they could be quite intense, so anyone who jumps in with both hands on the next 100-point drop may be in for a bit of a let-down if the hedge funds that are ramping up margin debt levels to all-time highs get caught and end up creating a big downdraft.
Unlike the late 90′s when the retail investor was margining up stock positions, only to get creamed during the tech/dot-com implosion, we today have hedge funds (big money) as the main margin player. Hedge funds can blow up and often do. Here’s one more fact to chew on as far as a “who may be left to buy” scenario. Nearly 90% of S&P 500 names are trading above their 200-day moving average. Talk about a near-perfect storm. If that isn’t begging for some hedge funds to take profits, I’m not sure how much better we can expect stocks to perform in the short-term. Again, the bad news could come for those who try getting aggressive with the known facts I just discussed. Slow and steady has always been the winning strategy when it comes to building exposure into the markets.Looking Toward Next Week
Looking ahead to the next week for stocks, earnings releases for the second quarter continue to slow down. Some of the companies reporting next week include Cisco Systems (CSCO), Kohl’s (KSS), and Wal-Mart Stores (WMT).
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