Market Top? Not So Fast
by Brooke Thackray, AlphaMountain Investments
It seems that every day more and more analysts are calling for a market top. This is especially true since the Dow Jones Industrial Average has recently reached all-time highs. The call for a top is primarily based upon the misguided wisdom that the market has risen too far too fast and therefore must correct. This statement is fundamentally incorrect as the market can keep rallying. Investors should never sell just because the market has had a strong rally. If they do, more often than not, they will fi nd themselves being left behind.
According to the Relative Strength Index (RSI), the market is NOT overbought as it is below 70 and rising. To set the record straight.....the term âoverboughtâ is grossly overused. The fact that an investment is overbought is meaningless as any investment can stay overbought for a very long time. Investors should NOT try to time their buys and sells based upon whether an investment is overbought. There are some technical strategies that generate buy and sell signals based upon the RSI crossing certain levels, but that is another matter.
In my last newsletter I raised the possibility of a âthreepeat,â with the cyclical sectors underperforming in the spring time, for the third year in a row. The cyclical sectors tend to outperform at this time of the year and when they donât, it is a sign of a market that is becoming more defensive. To be clear, as I stated in my last newsletter, this does NOT mean the market is set for a major correction. It does mean that investors should be more selective in choosing their seasonal sectors.
This year, the deep cyclicals (commodity based) have had their troubles. In my last newsletter I described the metals and mining sector as a canary in the coal mine for the deep cyclical sectors. In February and March, the metals and mining sector âcrackedâ as it started to substantially underperform the S&P 500. Its underperformance points to possible further weakness in the deep cyclical (commodity) sectors. If the metals and mining sector is able to sustain a strong rally, this would be a very bullish scenario for the market.
In very recent days the metals and mining sector has had a bounce, but investors should not get too excited as these bounces are common in a corrective action. Although it is possible that the metals and mining sector does put in a strong performance, the risk-reward relationship currently favours avoiding this sector.
The poor performance of the metals and mining sector and the commodities is being largely driven by the extremely strong performance of the U.S. dollar. From a seasonal perspective, on average the U.S. dollar performs well until the end of March and then falters. If the U.S. dollar does correct on its seasonal que, it is possible that we could have a strong month in April for the deep cyclicals. This will be addressed in more detail in the next newsletter.
Just as the metals and mining sector was used to forecast a weakening condition in the deep cyclicals, the U.S. fi nancial sector can be used to help determine if the S&P 500 is in a topping process. As I have written before, generally when the U.S. fi nancial sector is performing well, it indicates that the S&P 500 is on solid footing. If the sector cannot perform well during its seasonally strong period, then this often indicates that the market is close to a topping process.
After an early seasonal run, the sector is performing slightly better than the market. So far all is good. Investors should remember that the period of seasonal strength for the fi nancial sector lasts until April 13th.
Read the complete Thackray Market Letter here, below:
Thackray Market Letter 2013 March by
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