12/5/2011 - Short-term Positive Seasonals vs. Higher Intermediate-term Risks

12/5/2011 - Short-term Positive Seasonals vs. Higher Intermediate-term Risks

Written By: Matthew Xiarhos
Categorized in: NEWSLETTERS

Equity Market Overview

The outlook for the global equity markets remains tenuous. Last month I indicated that a correction seemed likely. Markets did decline about 10% yet have recouped nearly all of those losses in just a few days following coordinated intervention by global central banks. The rally off of the October lows and continued unprecedented volatility strike me as having the characteristics of a bear market rally rather than a healthy bull market advance. Historical studies of volatility going back many decades illustrate that both the magnitude and frequency of large daily, weekly and monthly fluctuations recently are not only quite rare but have typically occurred within ongoing bear market declines.

At present, short-term measures of investors sentiment are not too highly elevated. Further, short-term seasonal trends are positive into the holidays. This suggests that there may be some near-term market strength into a re-test of the October highs.

Any such short-term strength into a re-test of the October highs should be viewed with suspicion and caution as the odds favor the completion of a market top and subsequent intermediate-term weakness that may ultimately test the October lows.

US Equity Markets (Equity Style Model)

Our Domestic Equity model is in a defensive (100% cash) position at this time.

International Equities

Our International Equity model remains in a 100% defensive position.

Investment Grade Bonds

Over the coming months and quarters, the bond market appears to have all the makings for the next bubble to burst. A combination of a weak economy, extraordinary Federal Reserve easing and heightened anxiety about stock market volatility have driven bond prices to untenable heights.

Bond investors should carefully scrutinize the credit quality of their bond portfolios and significantly limit the duration (maturities) of any holdings. Long-term bond prices could drop 15-20%.

High Yield Bonds

Our High Yield Bond model is on a BUY.

Real Assets / Inflation Hedges

The Real Assets model is still bullish on Gold but bearish on REITs and Commodities.

Currencies

The Currency model has no positions at present. The USD and Chinese Yuan are top contenders for new long positions. Risk/growth currencies should be avoided. The Yen's long-term use as a carry trade safe haven is also at risk and should be avoided.

If you have any questions about our research or Absolute Return Portfolios do not hesitate to call. We can be reached toll-free at 877-632-7491.

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