Stock Market Update 6/14/13

June 14, 2013

From Cabot Market Letter

Legendary mutual fund manager Peter Lynch once wrote, “If you spend 15 minutes a year studying the economy, that’s 10 minutes too many.” Lynch was renowned for his ability to pick great stocks based on fundamental factors, and in that pursuit, he found macroeconomics fairly useless. We tend to spend a little more time than Lynch studying the economy, mainly because we enjoy it, but the fact is, that study has almost no effect on our recommendations.

Today, for example, it’s clear to most observers that the 32-year downtrend in interest rates is over. The reasons are not important from an investment perspective. But the growing perception that the Fed will finally shift from easing to tightening has put an abrupt end to the flow of money into both bonds and “safe” high-yielding blue chip stocks like Johnson & Johnson, Kellogg and McDonald’s. At the same time, conversely, many young growth stocks are actually doing quite well, perhaps reflecting buying by investors growing increasingly optimistic about the economy.

As a result, we have an interesting divergence in our market timing indicators! On the one hand, both our long-term and intermediate trend-following indicators remain positive (though the Cabot Tides are on the fence), with the greatest strength in the most “growthy” indexes. Many growth stocks we own or watch are doing well, too, providing confirmation of this strength. On the other hand, our Two-Second Indicator, whose greatest value lies in identifying market tops early, has been flashing a warning sign since last week as the exodus from interest-rate sensitive investments has pushed hundreds of issues to 52-week new lows.

Technically, therefore, we can say that the Two-Second Indicator is warning that the bull market is narrowing—and has possibly entered its final phase. If the trend-following indicators also turn negative, we will not be blindsided, and we will turn defensive. But we don’t expect that for quite some time, and here’s why. Some bull markets are bigger than others, and the current one is looking more and more like a monster, as the pieces fall in place.

It began with some great technical buy signals, when sentiment was absolutely horrible. It demonstrated excellent breadth in its first six months, as economic news improved. And now, with growth stocks resisting the weakness, and prepared to absorb the billions of dollars that are being redirected from those dividend-paying investments that suddenly look risky, the potential is there for an even stronger and narrower upmove by leading stocks.

We’ve seen similar patterns in past bull markets, where interest rate fears arose months before the bears took control, and we’re betting today that the current market will follow a similar pattern. So we’re staying on top of all the best growth stories today, and will look to fill our Model Portfolio with them once this selling squall ends. In the meantime, we’re holding some cash and our best performers.


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