I have been calling for a market correction since April –readers of this blog, readers of my Investors Digest and Moneyletter columns, and BNN viewers got a “heads up” on this potential at that time. To insulate against such a correction, I recommended readers raise cash in their portfolios by selling some of their stock holdings. If you read my blogs regularly, you will recall in June (http://www.valuetrend.ca/?p=2216) that I warned against interest sensitive stocks weakening. My columns in the aforementioned publications (you can access them free under the ValueTrend website by clicking the link at the bottom right of the page www.valuetrend.ca) ,also recommended that readers sell some of the interest sensitive stocks. My belief that a cyclical rotation out of the banks, pipelines and REITs might occur later in the summer—although it started earlier than I thought, I must admit. . I now see a potentially oversold situation for some of the interest-sensitive’s mentioned above, which may be worth a trade at this time given their recent selloff. Wait for a bounce.
In the equity portfolios that I manage at ValueTrend Wealth Management, I raised about 40% cash between late March and early April. The selloff that ensued on the TSX justified this decision. For a while, the American markets seemed to be immune from correcting their overbought conditions. U.S. markets climbed through the first half of May. Nonetheless, I stuck to my guns and held cash. May 22nd marked the peak of the U.S. markets, and my bearish prognosis has been proven correct – although early for the US markets. U.S. Federal Reserve Chairman Ben Bernanke recently implied that the Fed would begin paring back the monetary stimulus that has buoyed the economy (and markets) for over 4 years. We are now experiencing the correction that was anticipated. No sectors were immune from the selloff. Virtually every world market sank in June (China, Europe, Emerging Markets, North America). No asset class was spared. Gold, bonds, preferred shares, and commodities sold off sharply through late May and June. Even short termed bonds (which are normally a safe haven) pulled back in price
The current profile for the market is near-termed bearish – note the lower highs and lows on the chart above. Look for support on the S&P at 1500-1540 —which isn’t too far from here. After that, I’d expect a bouncy, go-nowhere summer.
It is my strong opinion that the Fed is now weaning the markets off of its favorite drug (monetary stimulus) as it enters a new era of “QE3-freedom”. Through a carefully planned series of speeches and word-plays, I expect that the Fed will rotate between hawkish and dovish statements over the summer. This should gradually reduce excess market exuberance, while avoiding an outright bear market panic. The Fed knows that the money-printing game can’t go on forever. But Bernanke and crew are also aware of the “wealth effect”; that is, the tendency for consumers to increase or decrease their spending habits according to the value of their investments. A higher portfolio value buoyed by bullish stock markets adds to consumer confidence and security, which in turn stimulates economic growth. So don’t expect the Fed to sit idly by if stock markets correct too aggressively. At the same time, we can’t realistically expect monetary stimulation to last forever. The Fed has tough job on its hands, but I believe that they will ultimately succeed. For that reason, although I do expect a choppy market this summer and into the fall, I believe that the market will remain in a larger-picture bull market for the next year or longer.
Keith on BNN
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ValueTrend Performance Numbers for June 30, 2013
I’ve posted June’s ValueTrend performance numbers at www.valuetrend.ca – click on equity or fixed income for the appropriate category.
We’ve managed to continue adding alpha over the market’s returns, both since inception and lately (given our high cash component in the recent selloff). As noted in the past, we are amongst the only Advisors and Portfolio Managers who we are aware of who disclose performance on the internet. We think this distinguishes us as managers with nothing to hide.