Category: Equity

The S&P 500 is finally trending down after going through a monstrous rally:

This is getting very close to the prevailing trendline. If it breaks then most of the technical traders will take the index down further. What is most fascinating is that the longer term interest rates haven’t gone down over the past 10 trading sessions, which suggests that there has been a decoupling of the “risk-on”, “risk-off” mentality.

Thus, we could be entering into an environment where everything will drop, equities and bonds alike. The only safety will be in cash.

However, my gut instinct suggests that we’re going to get one more good market rally in the summer before a strong concentration in cash is warranted. Currently I am sitting in a 10-15% cash position after raising some money.

There hasn’t been a heck of a lot to report in the markets lately other than the S&P 500 continuing its rise up as the perception of the recovery continues.

That said, I believe it is unstable and historical norms would suggest that if one applies a bit of regression to the mean that we’re probably closer to the inevitable local high than the local low.

This is exactly why I have been slowly unloading some positions as they have gone higher. I’m no longer in a net negative cash position, and the cash percentage will continue to increase as the market continues to increase.

A few other observations.

One is that the Canadian dollar is testing lows. They have traded very narrowly since the 2008-2009 economic crisis and they are at the low end of the range. With the perception of Canada being a commodity market and the perception that our interest rates are not going to be rising anytime soon, this may signal a continued decline of Canadian currency relative to the USA.

The other observation are about long-term bond yields creeping up:

I am not sure what to make of this. Certainly bond traders are adding supply to the market and dumping it into equities, but this is the classic “risk-on” type formula where you have anticorrelation between bond prices and equity prices. Right now equity and any non-fixed income assets are winning.

I look at the year-to-date performance which is still significantly positive and my gut is telling me to cash out and call it a day until rainier days hit the markets. This will continue to happen as markets continue to rise.

Stock markets are reaching all-time highs. The S&P 500 is well beyond the peak it reached in 2007. Sentiment is positive, what can go wrong?

Please realize I am a horrible chartist and the trendlines drawn are merely approximations. However, over the past three years, the S&P 500 has seen three major periods of rallying and note the dates/values are approximate:

08/2010 to 02/2011 (6 months): 1,040 to 1,340 (+29%)
11/2011 to 03/2012 (5 months): 1,160 to 1,420 (+22%)
06/2012 to 09/2012 (3 months): 1,270 to 1,470 (+16%)
11/2012 to ??/???? (6 months and ongoing): 1,350 to 1,620 (currently) (+20%)

Given historical trends, this rally is about to run out of gas. The party will likely stop sooner than later, so be careful and raise cash.