Some fundamental, technical and intermarket signals have been flashing *caution ahead* for the last couple of weeks. For example, the leading economic index has been going down recently and industrial metals have been severely underperforming. Still, many investors have been thinking twice before shorting the market or raising cash, and who can blame them? Who wants to stand in front of Ben's steamroller? Once the Fed's open market operations start, you either become part of the steamroller or you become part of the road; and nobody likes to look like those poor dead raccoons on the road right?
Also, as Keynes said..."markets can remain irrational longer than you can remain solvent."
But we also know that Mr. Market never works in a straight line and it loves to rest between workouts. Bears always come back to feed on fear, and some investors may have been overconfident thinking the bear was dead for now.
"Never sell the bear's skin before one has killed the beast"
Jean de la Fontaine
With that in mind, I will quickly post three simple graphs in this article that were signaling caution ahead.
The first one is an intermarket relationship: consumer discretionary sector XLY vs. consumer staples sector XLP (represented by ETFs). A large portion of the economy (the percent is debatable), is constituted by consumer spending. It's healthy to watch how people are spending. This trend is worrisome. It has been falling fast while the market was resiliently bullish.
A second popular warning came from the U.S. dollar ($USD) as shown below.
Bond market and stock market internals were showing that some trouble was in the works. Take for example our third image below, which shows how the stock market sectors were behaving. A risk-off behavior can be observed over the last month as defensive sectors like utilities (XLU) and healthcare (XLV) were easily outperforming financials (XLF), industrials (XLI) and basic materials (XLB).
Will there be a correction big enough to ensure a favorable risk/reward ratio for the bears to short the market? That's another question.
For my part, I don't like to bet against an easing monetary policy that shoots $85 billion per month. Reducing exposure to equities and raising cash seems to me like a safer option at this time. This may be a small healthy pullback, which may provide a good opportunity to buy quality growth stocks. In the near future, I will try to make some time to analyze some of the best growth stocks selling at good prices to take advantage of the dip.