Caution is Warranted Despite Winning Streak

The Fed-inspired rally continues, however caution is warranted.

 This might be a time to recall the Wall St. adage, “It’s not what you make, but what you keep”. For some time now the only real economic positive (to the stock market) has been the continued monetary policy (QE III) of the Federal Reserve. Low rates have forced many investors out of the safety of CD’s and bonds and into riskier stocks in search of return. Trouble is that policy has only ½ worked.

According to an article at buinessinsider.com, the smart money has been net sellers this year, while the retail (individual investor) has been the buyer. In other words, what Bank of America Merrill Lynch’s (BAML) big clients have been selling, their brokers have been finding buyers among their individual clients. Anyone a client of BAML and gotten a call this year about what a great deal stocks are? Next time you might want to ask why all the big guys are selling if stocks are such a great buy!

 Here’s a piece of the story. And a link to more:

So far in 2013, BAML’s retail clients have put $7.37 billion into equities, while big institutions have taken $10.69 billion out of the stock market, and hedge fund clients have reduced their holdings of the asset class by $423 million. 

Read more

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My Take

I’ve felt for some time that we are just along for the ride. There just aren’t solid fundamentals to justify this year’s gains, let alone a continued rally. However, all year, the “story” has been that the economy and corporate earnings will accelerate into the end of the year and continue through 2014. We have just started 2nd Quarter earnings reports, and along with actual earnings we will hear about outlooks for 3rd Quarter and beyond. This “guidance” hasn’t been great, but we are still early.

The question will be, if the earnings outlook is gloomy, can the Fed’s reassurances that ZIRP (zero interest rate policy) and a continuation of QE III be enough to keep the market afloat and bring back some of the “big” money?

My advice is to have a plan, and stay nimble.

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bill@401advisor.com • 937.434.1790

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Charles H. Dow Award Winner 2008. The papers honored with this award have represented the richness and depth of technical analysis.

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