After a brief three-day pullback in stocks and a small rally in bonds, we are still left with the same reality; stocks have now outperformed bonds for almost six months, but investors are just now waking up to that fact.
Money continues to flow into bond funds with an emphasis lately on taxable bond funds. Morningstar recently reported that:
Taxable-bond funds dominated inflows by asset class. These offerings collected $28.9 billion during the month of February, their highest monthly intake since March 2010.
Outflows continued for U.S.-stock funds as investors redeemed $1.2 billion in February. However, this was the smallest monthly outflow for the asset class in 10 months.
What Has This Meant in the Past?
When stocks have outperformed bonds by a wide margin over the past 40 years (> 1,000 basis points) the stock market has continued higher in the next quarter with an average gain of > 4.5% and been up more than 85% of the time. Credit goes to Bespoke Investment Group for this insightful analysis.
This adds more historical fuel to our long-held belief that 2012 would be a good year to own stocks based on the four-year presidential cycle patterns. Our target for this year remains 1,450 - 1,500 on the S&P 500 (SPY) Average.
With the S&P 500 Average at 1,392.78, down 1 ½ % from its recent closing high of 1.409.75, there is still plenty of opportunity in the stock market for patient investors. This pullback may continue for a bit but we will soon have 1st-quarter earnings reports upon us. In all likelihood these earnings reports will help fuel further advances in stock prices into the middle of April. Even in the retail sector where sharply rising gasoline prices usually take their toll, recent earnings reports from lululemon (LULU) and Nike (NKE) suggest that all is well with the consumer.
What Should I Do Here?
Begin to nibble on stocks with our bullish ratings (see my rating methodology) in the Banking, Electronics, Finance, Technology and Retail groups, being particularly aggressive on any days where developments out of Europe create very weak openings in U.S. Stock Markets.
Sell stocks with our bearish ratings and tilt your portfolio toward stocks with bullish potential that have the highest probability to succeed and to receive positive earnings surprises.
Click here to view this week's industry group report featuring the strongest and weakest industries with the most bullish and bearish stocks.