DVY and PEY: Ned Davis says dividend-paying stocks will outperform

Ned Davis has run Ned Davis Research for 25 years, focusing on asset allocation using technical analysis- - particularly analysis of investor sentiment. In an interview in this weekend's Barron's, he comments on the outlook for dividend-paying stocks. ETF investors can implement his recommendations with DVY and PEY. Here's what he says:

Q: What are the strongest groups in the post-election year?
A:
Very defensive groups. We have done a study breaking bull markets down
into thirds. In the first third, there is a lot of stimulus and stocks
that don't pay dividends in the S&P 500 actually beat
dividend-paying stocks in the first third of the bull market by about
6%, which is remarkable. That has happened in this cycle. In the third
stage, it flips totally around and dividend-paying stocks outperform
non-dividend paying stocks in the S&P by more than 6%. At the start
of the bull market people go for riskier assets, then as we get closer
to the end the bull market cycle, they go for defensive groups.

Q: What's bullish about the bond market?
A: One of the
things that feels decent about the bond market and why I would be a
buyer again at the 4¾%-5% range, is that domestic bond funds have 9.4%
in cash. That's the highest amount of cash in bond funds in 15 years.
You can see in the commitment of traders data that large speculators,
hedge funds, are short the bond market and so are the dealers that
trade the bonds. This should be the smart money, but it turns out their
record is not very good and they are in the largest short position in
years. If the Fed keeps pushing rates up here and inflation doesn't
come down and bonds get back up to 4¾%-5% zone, I would be a buyer.

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