The S&P 500 has not merely been resilient in its six consecutive weeks of gains. The celebrated U.S. stock benchmark has been unstoppable in its 8.3% unrealized run-up.
Granted, nearly everyone expects a period of mild selling activity (a.k.a. “a breather”). Indeed, history certainly suggests that unbridled enthusiasm usually gets a reality check or three. The most popular bugbears? Think in terms of the automatic spending cuts to defense, a free-falling yen and Spain’s rocky road in 2013. In fact, iShares MSCI Spain (EWP) is struggling at its 50-day support.
I’ve been asked many times whether I am bullish or bearish on “the markets.” And I often find myself explaining that my strength as the president of a Registered Investment Adviser with SEC rests with the recognition that predictions often distract investors from achieving financial goals.
I have emphasized that far too many folks are dismissing the Eurozone’s problems as manageable, while others fail to realize that China has turned its economy around. In fact, I remain committed to Asian investing via iShares MSCI Asia excl Japan (AAXJ) and I avoid direct exposure to the euro or the countries in the monetary union that drag on Europe’s economy. To the extent that makes me bullish on Asia and bearish on Europe… so be it.
There is a difference, however. I incorporate trendlines, stops and hedges to reduce the risk associated with being wrong. And no doubt about it… there are times that I will be wrong.
Yet I do not buy-n-hold. I am not married to my belief that opportunities for vibrant trade as well as domestic consumption in Asia are expanding. Instead, if AAXJ hits a stop-limit loss order or falls below a long-term 200-day moving average, I would reduce the risk by selling some or all shares for my clients.
So should you simply invest in domestic (U.S.) companies? Shares have been rising at a faster rate than international or emerging market counterparts over the last month.
In spite of the U.S. market exuberance, some of the reasons cited for the gains do not hold up to scrutiny. For example, the idea that 70% of U.S. corporations have been beating Q4 revenue and Q4 profit expectations is less than impressive when analysts are consistently downgrading those expectations; the hurdle becomes a mole hill. What’s more, these very same companies are lowering their own Q1 2013 estimates (as opposed to raising them) at a ratio of 4:1. Analysts have cut Q1 earnings projections in half since the year began, from 3.4% to 1.7%.
None of this seems to matter to investors who have decided its time to leave bonds and enter equities. Yet it does significantly increase the likelihood that the market will get far ahead of itself on a price-to-earnings basis, especially when prices are rising and earnings are contracting.
And there’s more. While virtually all stock sectors have been gaining ground in 2013, lower volatility sector ETFs like Vanguard Consumer Staples (VDC), Vanguard Telecom (VOX) and iShares DJ Pharmaceuticals (IHE) have lower Relative Strength Percentage Rankings than they boasted 3 months earlier. In contrast, higher beta sector ETFs like SPDR Select Energy (XLE), SPDR Select Industrials (XLI) as well as First Trust Internet (FDN) have higher Relative Strength Percentage Rankings than 3 months prior.
In sum, rational or irrational, Fed-fueled or economic renaissance, risk-taking in the U.S. market is back in vogue. Risk-taking in the international markets has been a bit more constrained, perhaps because the European Central Bank (ECB) is not lowering its interest rates and it is not currently purchasing member country bonds at a pace of $85 billion per month. And with the Eurozone’s economy shrinking, an absence of new stimulus has investors rethinking whether European exposure is worth the risks after all.