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Little Jimmy

As we suggested last week, it looks like January 30th was a meaningful short term bottom for the US stock market.  Buyers are stepping up again while mom and pop statistically are getting nervous.  February has also ushered in a new list of leaders that point to a higher market for March and April. There is probably one more good rally in the market before a “Rate Hike Reaction” this summer and fall. We’ve been playing some very solid defense since late last year but it may be time to make hay while we can.   This week will be very important.

Little Jimmy

I created this slide for our annual meeting last October describing the scene as representative of the current market conditions.  It is still valid.

Little Jimmy (The Market) above has been weaving and wobbling back and forth across the road this year and we have all felt the volatility and fear of wondering if he’s going to fall down hard.  So far in 2015, he has come close but managed to recover each time.  Mom (The Fed) is smiling as she knows that the market will be just fine as it learns to ride without QE training wheels as long as the road (the economy) remains flat and without unseen obstacles.   People watching this scene (investors) are still nervous and strangely more nervous now than they were several months ago when little jimmy first set out on his own.

With only 35.5% in the bullish camp, this is the most negative investors have been toward the market since the last major low in October of 2014.  Sentiment figures are typically contrarian so we should take heart that FINALLY, investors are showing fear and we should expect some upside action in prices in the near future.

So things are happening as we might expect as the market works to find balance without the support of the Federal Reserve training wheels.  We’ll go from relief to worry and back again until investors become less afraid of the consequences of a rate hike.  For now, we’re in the relief cycle and there is some developing new evidence that March and April could be good months for stocks.

Bullish New Leadership in February

As I said last week, it will be important for the financial and technology sectors to at least participate in any rising market and preferably lead them higher given their combined weight of over 35% in the S&P500.  Last week was good for both, especially the financials.  Technology participated in the upside gain for the week.  Even more importantly, we had some very nice new leadership coming from small caps and mid caps both of which are on the very edge of breaking through some serious overhead resistance.  Last week, we also saw some notable strength in the basic materials, industrials and energy sectors which are all the late cycle leadership groups that tend to do well as economic cycles heat up.  This is all good stuff and the type of action we like to see signaling a sustainable rally in the markets.  Until now, we have had a market that was disturbingly dominated by defensive sectors like bonds, utilities, consumer staples and healthcare.  Last week, these were the weakest performers and many lost money!  So, if your portfolio has become over-weighted in those defensive areas, you can either upgrade to the more cyclical sectors as we have done or reduce your position sizes, moving to cash for the time being.  If you are going to sit in cash, remember that if the market moves higher in March and April, you cannot buy it after the fact.  As investors, we must be brave and buy when low risk opportunities present themselves.  Waiting to buy until the “coast is clear” seems to be a favorite investment strategy for those who always buy high and sell low.  As I said, 2015 is going to be a tough year to make money and buying late is not going to be a rewarding experience.  Also remember that a week or two does not make a trend and so far, this bullish new leadership is barely two weeks old.  I like what I see but we’re going to stay a bit reserved, as this market seems a bit prone to fake out moves this year.  This week is going to be important obviously.

Energy?  Still Too Early

Yes, I see the short term bottom in energy.  But I also see this, courtesy of Bespoke Research.

Energy prices are not falling because economic conditions are terrible as the hater party will suggest.  They are falling because we have a fairly massive imbalance between supply and demand.  Supply is VERY high and still rising while demand is, and has been, falling steadily since the middle of the last decade.   If the cycle of oil supply were at all similar to the last ten years, we would expect a peak around June, maybe May this year.  I do like the prospect of buying back into the energy sector at these levels but I do think it’s just still too early considering the damage of the last 9 months.  We need some time for this sector to heal before it can head sustainably higher.  Meanwhile, advanced energy like renewables, wind, solar, clean technology and efficiency stocks are suddenly charging higher up almost 10% YTD.  How can oil be so low and renewable energy be attractive?  Aren’t they related?  Find out by joining our webcast on the 19th! (info below) You might be surprised at the answer.  New Power investors take heart; this could be a good year for that rogue account of yours!

That’s it for this week

Sincerely,

Sam Jones