 As we continue to see the broad markets post positive returns for the year and commodity prices that seem to defy gravity, as investment managers, we try to seek "reasons" for what is occurring. When reading the many analysts and so called experts opinions, you could easily be persuaded to think things are great out there or as easily be convinced of the opposite; that things are not good. Simply looking at the stock market as an indicator could make you feel that things are good as gold, no pun intended! Let's take a look at a few things that raise concern and a few that continue to confirm the current "uptrend" we are in. First, a few concerns. If we simply look at the price of oil, about $113 per barrel, and bring that down to the basic function we use it for in our daily lives, which is fueling our vehicles, we could draw the assumption that $4+ per gallon gas could shift consumer sentiment to the negative, affecting how and where consumers decide to spend their money. The last time oil was at this level was in April 2008 when the economy was crashing. Some argue oil is a limited resource and the price "has" to go up. However, looking back in history, only a few months after oil saw its peak near $150 per barrel in the summer of 2008 it saw multi year lows in the low $30's that same December. A conclusion drawn from this analysis is that oil goes through boom and bust cycles just like most other assets. The question is, when will we see the pendulum swing back as it has in the past? Our next concern is the current level of the VIX (Volatility Index) at 15. (Click to read the actual definition of the VIX ) In simple terms, as volatility increases the VIX goes up, in most cases this occurs when the market (S&P 500) goes down. When the market goes up, volatility in most cases, decreases. The last time the VIX closed at its current price was back about the same time in 2007. When the market crashed in 2008 the VIX spiked up into the 80's. With that said, the VIX can be an indicator on where the market could be heading. Although not foolproof, when the VIX reaches extremes to the high or low, it is something to be aware of and observe. Another concern is studying how the stock markets have reacted to the Quantitative Easing process the Fed enacted to get the U.S. out of the recession. When the first round of QE ended last summer we saw the markets drop. Then QE2 was introduced and the markets have gone up since. QE2 ends in late June of this year. Some would argue that the end is already factored into the price of the markets but we'll wait and see. These are just a few of the many factors that can be analyzed and debated. However, we like to keep things simple when we manage in these environments. Until we see confirmation that the current short-term, cyclical bull market that we are in is concluding, we will continue to invest on the trend, which is still up. As of today our technical indicators confirm that this bull market is still intact, companies are posting solid earnings as we progress through earnings season and investor sentiment seems positive albeit getting to an extreme. With that said, we are also aware that the cyclical bull that started in 2009 is getting mature and with the overshadowing Secular Bear we are in the midst of, we need to be cautious and nimble when necessary to protect our clients capital. The opinions are strictly those of the author(s) and are provided for informational purposes only. No investment should be made as a result of this article without your personal due diligence and research, and with the counsel of an investment professional. |
