Time To Head For The Safety Of The Harbor?

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 |  Includes: SH, SPY, XLU
by: Bill Gunderson

Years ago, fishing off the central California coastline with my late father, I learned an important lesson that carries over to this day in my approach to investing.

We were after the magnificent Pacific King salmon. There's nothing better on the barbecue than fresh King, and it tastes even better if you have reeled it in yourself.

As soon as we heard the Kings were in, Dad and I would haul our small ocean-going center-console boat north. One year the springers, as early King salmon are called, had schooled in the cold blue water in front of the Diablo Canyon nuclear power plant on a fairly remote stretch of the craggy central California coastline.

The run from the Port San Luis harbor to where the fish had schooled took about an hour. The water was fairly rough on the uphill ride. But if we could get some fish, the uncomfortable ride in our small boat would be worth it.

On this particular trip, the fishing was good, the weather not so much. We had several salmon in the fish box within a few hours. By early afternoon we needed just one more salmon to fill out our limits.

But by this time, the wind had started to kick up, and the ocean swells got even higher.

I remember my dad saying to me, "Bill, the wind is starting to pick up. I think we better head in." We fished just a while longer before pulling up our lines and heading straight for the harbor.

By this time, we were the only small boat left on that particular stretch of saltwater. In those days we didn't have a marine radio. I will never forget how tightly I gripped the steering wheel as we bobbed up and down through the huge white-capped swells.

I sent more than one prayer aloft and worried that we might not make it. Luckily, we did, and the fresh salmon was as delicious as ever.

The lesson, of course, is that in investing, as in fishing, it can be dangerous to keep your lines in the water too long. Better to make it to the harbor safely and a little bit early than not at all.

So how does that lesson apply to today's markets? Fed Speak certainly kicked up the wind in the market a bit last week. The U.S. market saw a 250 point reversal on Wednesday, while the over-heated Japanese market was down 7% overnight.

After 50 months of a bull market that has carried the S&P 500 almost 1,000 points higher, investors are asking themselves once again: Is it time to pick up our lines and head for the safety of the harbor?

I start, as I always do, by looking at the big picture. Let's begin with looking at a one-year chart of the S&P 500.

Click to enlarge

The market is still above its short-term (20 day), intermediate-term (50 day), and long-term (200 day) moving averages bases. It may have been bruised a bit last week, but its overall health is still good for now.

In my opinion, the bond market looks terrible, however. I have zero exposure to the very dangerous fixed income markets. I am obviously not a believer in asset allocation. Why allocate money to a treacherous asset class?Click to enlarge

Next, let's look at the asset classes that are leading the market.

Data from Best Stocks Now App

As you can see, the market is still being led by the more aggressive "risk-on" asset classes, notably including small and mid-cap stocks. This is hardly a market that has all of a sudden turned defensive.

The wind may have picked up a little, but not enough to send us scampering for the harbor.

Next, let's look at the worst asset classes that have underperformed.

Click to enlarge

Data from Best Stocks Now App

Being short the market is still absolutely the worst place to be. Before you get nervous and start putting on hedges or heading for the harbor, take a look at the inverse chart (NYSEARCA:SH) of the S&P 500.

Click to enlarge

Ouch, that has to hurt! Yet, I still hear the same old bears still standing by their calls.

Now let's look at the sectors that are leading the market.

Data from Best Stocks Now App

There has been virtually no change in the market leadership for the last several months. Risk-on assets continue to lead the way - biotechnology, pharmaceuticals, homebuilders and related stocks and retail stocks.

Meanwhile, as shown below, metals, commodities, natural resources and emerging markets continue to be the worst places to be invested.

Data from Best Stocks Now App

These under-performing asset classes were joined last week by the utility stocks. With their relatively high dividends, utilities have been serving as bond proxies. Just the hint of any increase in interest rates was enough to send these stocks into a slide.

Click to enlarge

That is one ugly chart.

When rates do rise substantially, these stocks will not be nearly as attractive as they are in today's low interest rate environment. I prefer real estate investment trusts (traded ones) instead. They have the potential for capital appreciation going forward.

We all know that this rally, which has carried major averages up 20% or more since all of the noise about the fiscal cliff and sequester last December, will come to an end. We need to remain on high alert for a change in the weather.

But the major U.S. stock-market indicators all remain above key momentum indicators. I continue to overweight stocks that benefit from today's dirt-cheap low interest rates, including homebuilders and anything to do with the rebound in housing and real estate.

With up to 30 million more people soon to have access to the health-care system through Obamacare, I continue to favor biotechnology, pharmaceuticals, medical-device makers, service providers, nursing homes and related stocks.

I keep a close eye on the weather by filtering through hundreds of stock charts daily. Looking for signs that it is time to reel 'em up and head for the harbor. I don't see those signs yet. I remain virtually fully invested.

Just as I have been for the last four years.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.