With equities at all-time highs in the US and sentiment reaching ultra optimistic extremes, I think it’s a good time for investors to reflect on 2016 and turn to their goals and objectives for 2017. In the premium portfolio we run, we have being very wary about investing in equities for the past month to six weeks now. In saying this, the Trump effect definitely didn’t have the bearish effect on the markets that many thought it would have had. In fact the US dollar has gone from strength to strength and the S&P500 (NYSE:SPX) has taken out its former highs which should be reason enough that investors simply can’t short the US at present.
The longer investors remain bullish about the market, the more likely the market will suffer a deep correction. When “everyone is one one side of the boat” is when things will start to unravel but we are not quite there yet.
Source : Sentimentrader.com
The one outlier here is the bond market which definitely is responding to rising inflation and I just do not see this trend abating anytime soon. Rising inflation and rising interest rates over time will decrease the amount of money in circulation as more capital will have to be put to use in order to meet loans on mortgages and on cars, etc. Despite all the bullish comments you hear about the US Dollar and the US economy being the strongest in the world at present, rising inflation is a symptom of currency weakness and not currency strength. Therefore my personal view is that sooner or later, US equity markets will once again enter a bear market. Will our newsletter’s subscribers miss some of the potential upside side still in equities? Probably yes. However protecting the downside has always being our number one priority and always comes before upside potential
Therefore the only scenario where we would be getting long here would be with stocks with compelling competitive advantages. Furthermore these stocks would have to be recession-proof which basically means that their earnings and their share price would have to have a history of not being adversely affected during steep downturns. Moreover these stocks would have to be increasing their dividend at a healthy clip every year. They would also need to have a strong balance sheet (Just as good earnings, cash and debt levels prior to the last big downturn). If the next daily cycle low in the S&P500 is deep enough to really reset sentiment, then we may initiate some positions in some real quality undervalued Blue Chip stocks. Quality is a huge requisite here especially with equities trading at all-time highs.
However the harder equities keep rallying, the more we will lighten up on our equity positions over time. Remember that equities in the US bottomed on the 6th of March in 2009 which means we are now almost eight years into this long bull run. The higher we go, the more likely capital will start to seep out of equities and into other asset classes. This is where the big money will be made over the next decade. The investors who first ascertain which asset classes will undergo a bull run and secondly pick the best stocks within those asset classes will be the ones who make a fortune over the next decade