We express our concerns with equity markets in the four graphs below…….but particularly in the Value Line. For those of you who don’t know what the Value Line index is all about, in essence it is an equally weighted index of 1650 stocks listed in the US. We believe that it is the best index to analyse because it gives a fair depiction of the behaviour of the average listed stock in the US. Anyway, the Value Line is now unchanged in four months and as of the last 30 days it has been locked in a very tight trading range between 2200 and 2100. The behaviour of the Value Line is also being echoed by the behaviour of the international developed market (GWX) and emerging market (EWX) ETFs.
Perhaps the foregoing discussion merely states the plain obvious……..but now for the million dollar question – in which direction will the next move of significance be? A bull market is a bull market until proven otherwise. A bull market in equities started early this year. While the Value Line holds above the 2000 level equities remain in a “bull” market.
We think that equities will break to the upside over the coming weeks because we have yet to see any weakness in markets that typically bulk before equities….namely emerging market small caps (EWX & DGS) and junk grade bonds relative to US treasuries. In fact just last night the ETFs JNK and HYG closed at a multi-week high relative to the US Treasury ETF IEF. This is certainly not the sort of behaviour that you would typically associate with risk aversion!
In to the valley of darkness we equity bulls go again……..with our faith put in junk bonds and emerging market small caps to lead the way…….
Our wealth creation portfolio is up around 22.61% 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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