In my article discussing a time horizon framework for market-timing I mentioned why there is no such thing as the market being simply a “buy” or a “sell.” A market can be a “sell” on one time horizon, a “buy” on another and a “neutral” on two others.
In the present article I would like to clarify where I stand right now with respect to the U.S. equity market (^SPX, ^DJIA, ^IXIC, ^NDX) in various time frames.
Short-term trading. On a short-term trading basis, defined in this case as the next few days, the U.S. equity market (SPY, DIA, QQQ) is a buy. As pointed out yesterday, the details that are coming to light about a deal that is likely to emerge in Europe should provide an upward bias to the market in the next few days. Deterioration in Europe has been a major factor driving stock prices down; alleviation of fears regarding Europe will tend to lift stock prices upward.
Tactical. On a tactical basis, defined in this case as the next few weeks, my stance is neutral. I believe that it is possible that disappointing corporate earnings and guidance could adversely affect the equity market. In addition, I expect continued downward momentum to be exhibited in economic data to be released around the world, including the U.S., Europe and China. It will be difficult for stocks to break out of their current established range (roughly between 1,120 and 1,230 on the S&P 500) to the upside in this sort of environment.
Strategy. On a strategic basis, defined as the next one to five years, I am guardedly optimistic: A cautious and selective “buy,” if you will. Stocks generally represent good value right now. However, due to the fact that I expect increased macroeconomic volatility to be a constant threat in the next few years, I believe that stocks will tend to stay cheap by historical standards due to high levels of risk aversion. This sort of environment will place a premium on good stock selection over the coming years.
In terms of grand strategy, defined as five years and beyond, the spread between the earnings yield and the yield on long-term Treasuries (^TNX, ^TYX) is extremely high by historical standards. As such, I believe that long-term investors have a historic opportunity to take advantage of this spread by switching entirely out of bonds and into equities (and/or shorting bonds in order to finance a leveraged long equity position). This is the kind of highly unusual asset allocation opportunity that historically presents itself only once or twice in a generation.
Conclusion
It is important that strategists be clear about the time horizons that their predictions pertain to. In my case, I predict different market trends over different time horizons.
Right now, I am relatively bullish in the very short term. However, I am generally cautious over the next few weeks and would refrain from major commitments.
I am only cautiously optimistic over the next year to five years. Stocks such as Apple (AAPL), Microsoft (MSFT), Intel (INTC), AT&T (T), Verizon (VZ), Pepsi (PEP) and Goldman Sachs (GS) should do well in the context of a generally volatile and sideways trending equity market over the course of the next few years.
Finally, I am quite emphatic about the need to immediately get out of bonds (TLT, LQD, JNK), move into cash and gradually commit to equities – preferably supported by skillful shorter-term market timing in order to enable the best possible entry points.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: I am short TLT and long TBT and SBND.
