It seems that fundamental news continues to improve. Last night there was positive news coming out on home sales and factory orders. However, the market (as per the S&P 500) did not budge. Is this the beginning of a top in the market? We would not be surprised to see some sort of correction in the magnitude of say 5% over the coming days. However, we do not see any correction being enough to warrant short or bearish positions.
We would like to draw your attention to the behavior of emerging bond markets and also the high yield corporate bond market. If equity markets were in fact getting ready to move materially lower we should have already seen weakness show up in the bond markets. From what we can tell there does not seem to be any weakness worth noting and no apparent loss of momentum. We use the Fidelity New Markets and High Income funds as proxies for the emerging market bonds and US high yield corporate bonds.
When will we get bearish on equity markets? We don’t know when, but we do know what will cause us to become bearish. And that is an out of the ordinary bearish move by both high yield and emerging market bonds. Something like when both the charts above have become bearish on a rolling 60 day basis.
Our wealth creation portfolio is up 15% since the beginning of the year with approximately 40% of the volatility of the S&P 500. This portfolio is not leveraged.
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