Markets Heading Higher in What Experts Agree Is a Scary Long-Term Setting

by: MyPlanIQ

In the latest Barron's Roundtable, it states "The big picture might look scary, but the stock market is heading higher, say the members of the 2011 Barron's Roundtable." We would further quote the very first excellent paragraph in that report:

From the halls of Congress to the malls of California, we've been kicking the can down the road. Postponing our troubles, inflating our bubbles. Putting off, for tomorrow and tomorrow and tomorrow, the crushing problems that cry out to be dealt with today. Is this any way to run a country? Based on the stock market's stellar performance in the past two years, you bet it is.

This is exactly what we are observing for an array of diverse major assets: last week, commodities (DBC or GSG), U.S. stocks (NYSEARCA:VTI), international and U.S. REITs (RWX, IYR) and emerging market stocks (NYSEARCA:EEM) were in the top spots in our trend ranking table. In the meantime, the 'safe' assets like municipal bonds (NYSEARCA:MUB), mortgage bonds (NYSEARCA:MBB) and even the total U.S. bonds (BND, AGG) had negative trend scores, placing them below Treasury bills (NYSEARCA:SHV) or cash. See the following table.

The trend score is based on the following formula: for an ETF or index, we use the average of 1, 4, 13, 26 and 52 week total returns (i.e. dividend and distribution reinvested). We then rank them based on the scores to derive the following trend table. Notice the average of the total returns would overweight the recent price movement. This is similar to exponential moving average.

Assets Class Symbols 01/14
Trend
Score
01/07
Trend
Score
Direction
Commodities DBC 12.82% 7.98% ^
US Stocks VTI 12.25% 10.18% ^
International REITs RWX 11.61% 8.44% ^
Emerging Market Stks VWO 10.9% 8.03% ^
US Equity REITs VNQ 10.82% 9.17% ^
Frontier Market Stks FRN 10.23% 9.72% ^
International Developed Stks EFA 6.87% 2.76% ^
Gold GLD 6.18% 5.84% ^
US High Yield Bonds JNK 4.56% 4.08% ^
International Treasury Bonds BWX 1.11% -0.96% ^
Emerging Mkt Bonds PCY 1.1% 1.44% v
US Credit Bonds CFT 0.88% 1.17% v
Intermediate Treasuries IEF 0.14% 0.43% v
Treasury Bills SHV 0.0% 0.03% v
Total US Bonds BND -0.03% -0.07% ^
Mortgage Back Bonds MBB -1.01% -0.89% v
Municipal Bonds MUB -5.54% -2.38% v
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Zooming in, one can see (refer to a detailed performance table here) that international stocks (NYSEARCA:EFA) registered a big jump (3.6%) last week. This is mostly due to Euro rebound and the general stock market euphoria. Meanwhile, commodities (NYSEARCA:DBC) were also strong (3.3%) because of oil and agriculture commodities strength.

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At the moment, U.S stocks are not cheap based on various long term stock valuation metrics including Shiller CAPE (or PE10) and Hussman's peak PE. Moreover, through the year-end rally, stocks are in an overvalued, overbought, overbullish, rising-yields climate (using Hussman's words). Though the intermediate term picture looks rosy, one needs to be cautious and have a systematic portfolio strategy to navigate through such an environment.

To summarize, hard assets (REITs and commodities) and 'safer' risk asset (i.e. U.S. stocks) are on the rise while in the meantime, cash is better than lending money to anyone else.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.