Technical Talk: Buying Power Argues for Contained Correction
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January 29th, 2010 by Prieur du Plessis, Investment Postcards from Cape Town
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The comments below were provided by Kevin Lane of Fusion IQ.
As seen in the chart below, individual investor allocations to equities have only recently moved back above its 21-year mean allocation of 60%. The massive under-allocation to equities in late 2008 into the 2009 low was one of the major reasons we became so bullish on stocks since it suggested that selling was washed out of the market and massive liquidity (aka - buying power) was built up ready to buy back into stocks.
That said we have seen assets rotate back to equities over the last 10 months and the market, being a liquidity driven animal, has responded accordingly. Currently investors have only a slight overweight to equities at 4.0% above the 21-year mean or stated another way investors are now 64.0% allocated to equities versus the 21-year mean of 60.0%. This is one reason why we continue to believe that after a bit of a correction stocks can move higher as investor liquidity is not tapped out yet.
While not as ample as near the lows buying power remains adequate to power/move stocks higher and keep corrections fairly well contained.
Source: Kevin Lane, Fusion IQ, January 28, 2009.
Dr. Prieur du Plessis is an investment professional with 26 years' experience in investment research and portfolio management. More than 1,200 of his articles on investment-related topics have been published in various regular newspaper, journal and Internet columns, including his blog, Investment Postcards from Cape Town. He has also published a book, Financial Basics: Investment. Prieur is Chairman and principal shareholder of South African-based Plexus Asset Management, which he founded in 1995. The group conducts investment management, investment consulting, private equity and real estate activities in South Africa and a number of foreign countries. He also serves as Honorary Consul of Slovenia for South Africa, actively developing economic, cultural and scientific relations between Slovenia and South Africa. Prieur is 54 years old and live with his wife, television producer and presenter Isabel Verwey, and two children in Cape Town, South Africa. His leisure activities include long-distance running, traveling, reading, motor-cycling and scripophily. Read more from the author/contributor here.
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