Markets Are Heading Higher

Over the past three weeks in EPIC Insights, I have highlighted how bullish market sentiment has become. Each week, a broad array of indices pushes to new highs in a well-defined, synchronized manner. During the rally, I have remained cautious, as chasing runaway markets often leads to frustration. When the Dow Jones Industrial Average (Dow) increased 11.6% in two weeks, I was anxious to see how prices would move. With the market overbought, digestion of the gains was needed. Would we see a continued rally or a quick correction of the sharp rally?

What has transpired over the past week is extremely bullish. When a market is overbought, there are two possible outcomes. The most common is a decline that eliminates a portion of the recent rally. The other, more bullish, outcome is sideways movement that digests a portion of the gain before the rally resumes. Abby Joseph Cohen often describes a great bull market as a staircase. First the market rallies, then it moves in a consolidating range, and finally it pushes higher again. With European markets having joined the move, the rally has synchronized and is displaying the powerful staircase pattern.

Looking at the charts of three different indices-London's FTSE 100, Brazil's Bovespa, and the Dow Jones Industrial Average-we see a familiar story: sharp rallies higher (solid black line) give way to a horizontal trading range (green dotted lines) that consolidates the sharp gains. Once the consolidation period is over, prices move higher again. This classic staircase pattern combined with the series of synchronized highs witnessed this past week illustrates that the market is technically strong and will continue to push higher. Although I remain concerned about the long-term direction of prices and convinced that we will be marred in a trading range market for the next decade, the short-term trend is clearly higher.

We have been waiting patiently for the right moment to enter the market and I believe we have reached it. Our portfolio has a very low equity exposure which can be remedied by purchasing a variety of ETFs. To benefit from further global increases, I recommend the following five ETFs: iShares EAFE (EFA), iShares Global 100 (IOO), Powershares QQQ Trust (QQQQ), iShares MSCI Australia (EWA), and iShares MSCI Brazil (EWZ). In order to keep market specific risk low while enjoying the rally, I recommend a 2% portfolio position in each of the following ETFs: EFA, IOO, QQQQ, EWA, and EWZ.

Comments

[Moon Kil Woong]

Yes the markets keep rising some fraction of the net wealth destruction in America's net equity that currency devaluation is doing. Exchanging $500 billion for like 150 billion in stock equity yesterday as the market rallied on a 1% decline in the dollar's value is a prime example. Not all American's are fooled by such action. Yesterday was a equity loss for Americans like so many other days the dollar fell even if the market rallied. Bernake is burning down our economic house just to keep himself warm for a night.

2009 Aug 04 07:27 AM

[Maxe Paul]

"We have been waiting patiently for the right moment to enter the market and I believe we have reached it."

You have waited patiently for a market top?

Rather strange strategy IMO.

2009 Aug 04 07:37 AM

[fdfe]

Dude, if I was a millionaire, I would get my money out of stocks as soon as possible and put it in Asia or Europe where the currency would be strong. I might put it in commodities too but i would think about putting it in dollar dinominated assets. By selling my millions and millions of stocks I would just crash the S&P and not think twice about doing it.

Keep buying

2009 Aug 04 07:49 AM

[chap08]

I agree that quote does sound strange but it all depends on your timeframe. The guy also says "Our portfolio has a very low equity exposure". Assuming that he is managing for long term returns, then a very low equity exposure is as big a crime as diving in now.


On Aug 04 07:37 AM Maxe Paul wrote:

> "We have been waiting patiently for the right moment to enter the
> market and I believe we have reached it."
>
> You have waited patiently for a market top?
>
> Rather strange strategy IMO.

2009 Aug 04 07:55 AM

[Maxe Paul]

I have never met anyone who made any money buying overbought stocks, well above the moving average, in a bear market, whether its a small amount of equities or large, short term or long term.

It's just horrible advice and needs no article written about it IMO.

I certainly agree with you that it's a "big crime" Amen!


On Aug 04 07:55 AM chap08 wrote:

> I agree that quote does sound strange but it all depends on your
> timeframe. The guy also says "Our portfolio has a very low equity
> exposure". Assuming that he is managing for long term returns, then
> a very low equity exposure is as big a crime as diving in now. <br/>

2009 Aug 04 08:46 AM

[manya05]

What many pundits have predicted. Money managers that sat on the sidelines are having a hard time explaining to their clients why they are on the sidelines (clients do not understand about low volumes, and do not want to believe in manipulation...only in the "invisible hand" of the market). These managers have now been dared to enter the market on a push to S&P = 1000 and above. This is a regret rally, once people wake up...watch out below.

2009 Aug 04 09:35 AM

[RiskReturnOptimizer]

TBT is ready for next leg up in the staircase ... next stop is $60 as the treasury sells more and more bonds each month ....

2009 Aug 04 07:01 PM

[williamwu]

So what are you going to do with the rest of the 90%?

2009 Aug 04 07:05 PM

[LaChic]

Those etf's you are recomending are almost at the high for the year, why would anyone want to buy now? all it takes is a number to bring this market down to reality, everything is smoke and mirrors, there are no revenues from any of these companies reporting earnings.
I closed most of my positions on monday, I'm now in cash, with just a small position in Russia for gold and oil. And I have gold and silver.

2009 Aug 04 07:29 PM

[Adam855]

At this point I think the risk is higher to the downside. This is a bear market rally, which after a crash often moves 50% higher, which we're definitely getting closer to. There are likely gains still to be made in the short term (perhaps 1-2 months left), but I'm not brave enough to chase at this point, since you never know when market psychology will turn.

2009 Aug 04 10:23 PM