Cautious Approach as Stocks Grind Higher
Housing prices continue to slide, employment continues to drop, wages are down, the consumer has gone into hibernation, and yet the S&P 500 continued to move higher by 5.6 % in May and is now positive for the year at 4.16 %. Our results have been posted on our performance page. Of course there have been some positives as well, as the economy slowly pulls out of the economic and financial meltdown: housing has become affordable with low mortgage rates, equity valuations have become quite reasonable, the Fed should remain accommodative for the foreseeable future, and quite frankly, a lack of competition from cash and treasuries that we had in the seventies bear market cycle.
Although stocks should continue to grind higher (lots of cash on the sidelines and lack of competition) there remain some obstacles that I believe merit a continued cautious approach moving forward. The potential fundamental problems stated above as well as the undetermined results of the unprecedented monetary and fiscal stimulus are reason enough to remain cautious, but the technical's of this market are also reason for concern. As I have stated many times before, despite the impressive rally, breadth and buying pressure (lower than the May low) are not consistent with prior cyclical bull markets, and while it may prove different this time, it is my belief that hedges should remain in place.
-Joe