Seeking Alpha
Registered investment advisor, long only, bonds, dividend investing
Profile| Send Message|
( followers)  
Market volatility of late seems to be the norm due to concerns over European debt defaults, budget deficits and slow worldwide growth expectations. These issues are being somewhat offset by the large amount of liquidity that resides on corporate and individual balance sheets. This liquidity is seeking a home that offers better returns than U.S. Treasuries. The 5-year Treasury is yielding around 1.53% and the 10-year treasury is under 3%, trading at a yield of around 2.95%.

Our positioning of our client portfolios maintains an overweight in health care (more defensive sector) and technology (generating strong earnings growth). We continue to maintain an underweight in the financial sector, more specifically in banks, due to our concern about their earnings growth ability in the near term given the large amount of regulation coming out of Washington D.C. Our portfolio structure continues to focus on reducing the volatility in our client investment accounts.

We do believe the economy is still growing, although at a slow pace. Some of the factors inhibiting growth are the result of supply chain disruptions caused by the tsunami in Japan and floods in the Midwest. We believe the recent market pullback is an adjustment to a slower growth global economic environment.

It is likely money flow into equities and out of bonds could pick up in the second half of this year coincident with better clarity on economic growth. The financial condition of most large companies is strong as they hold record levels of cash on their balance sheet and continue to deliver strong earnings results, although earnings comparisons become more difficult in the second quarter. These financially strong companies should provide better returns than the low rates available on Treasuries. The recent market pullback seems to be providing investors underweight in equities with an opportunity to add to equity allocations and/or equity positions.

The equity put/call ratio at 1.1 is higher than the level reached at the market low in July 2010 and higher than the level at the market's low in March of 2009. Click to enlarge:

From HORAN Capital Advisors
Additionally, individual investor bullish sentiment as reported by the American Association of Individual Investors remains at low levels. Last week's reading was reported at 29.0%. Although this represents an increase of 4.58% from the prior week's reading, the 8-period moving average continues in a downtrend and came in at a lower 30%. This contrary indicator tends to be most accurate at the extremes. Click to enlarge:

From HORAN Capital Advisors
The excessive investor pessimism, a potential resolution to the Greek debt crisis early next week, even if only a short term one and decent equity fundamentals could see the market recover from oversold conditions in the near term.
Source: Adjusting to a Slower Growth Economic Environment