Cautious Me

June 11, 2014

Considering  present equity market data, I’m glad my bias is toward trend following rather than predicting the  market’s direction. And, I’m very happy that I’m so mindful of Investing Rule number one…..preserve capital.

Given the foregoing  and, recognizing  I can be very emotionally receptive and reactive to both positive and negative noise ,  please understand how difficult it should be  for me to contain my enthusiasm for equities at the present moment.

Dan Sullivan, the highly  esteemed editor of ” The Chartist” newsletter ( I subscribe ) indicated in his June 5 mutual fund  hotline that the market is signaling it intends to trend higher.  He cites the recent series of new S&P 500 highs in 7 of 8 sessions, that the Dow Industrials and Dow Transports have made new bull market highs (  A Dow Theory buy signal ) and that the 200 day trend line of the Advance / Decline line is moving higher remaining well above its 200 day moving average.  All positive signs.

Add to this,  the very good news relating to employment, GDP gains, Putin and earnings forecasts.

Worried about higher interest rates de-railing  the uptrend ?  Forget it.  An explanation has emerged as to why the USA bond market is rallying and not at the expense of stocks. The explanation is that  European ECB action is forcing European bond yields lower than USA bond yields ( Example: Spain where it’s risk laden 10 year bond is being offered at a lower yield than the risk free 10 year USA Treasury Bond. )  This is causing European bond investors to invest in higher yielding USA bonds driving USA bond  yields lower. Plus, the supply of USA government bonds is shrinking in the face of this growing overseas demand. Since USA bond yields compete with equity earnings yields for investment dollars,  lower bond yield expectations competing with higher earnings yield expectations can be very , very bullish for equities.

This morning I heard a guest analyst responding to another guest’s comments on the advanced age of this bull market by saying market ends are not date driven, they are data driven  and not to be surprised if this bull market goes on for another 2 or 3 years

So…..why am I  not ” All In ” ?

I’m not arguing with any of this.  All I am saying is that as  equities grind higher,  why is the climb being supported by fewer and fewer stocks participating in terms of  making new 52 week highs ?   And, why is daily volume so low in relation to 30 day normal volume?   I like to think of volume as  conviction, as thrust,  and as the wind in the market’s sails. Prices are moving higher but daily volume is not anywhere near 30 day volume averages.  Nobody seems to be saying anything about this.  But, I don’t like it.  So, I can’t be ” All In ” . In fact, as of this moment, the morning of June 11, 2014,  I’m only 35% invested in US equity ETFs ,  42% invested in Bond and Income ETFs and 23% in Cash.

Maybe lower than normal  market volume and narrower  participation in making new 52 week  highs means only that there will be a ” normal ” ” healthy ”  10% correction.  That’s perfectly OK , but corrections, healthy or not , are not my thing.

But, because I want to be ” All In ” and not  ” Miss Out ” on all the fun to be had and profit to be made, my plan now is to take out 1/ 12 of all non-equity money ( including cash ) on the first trading day of  each month and invest it in SPY, VTI , and  QQQ,  exiting these and  all investments by going to cash ( the money market )  when the 200 day moving average of VTI is above its price as of a month end close.  Then, re-entering the market ” All In ” when VTI next finishes above its 200 day moving average at a month end.

Richard Maurice Gore

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