DJIA Closing Above 11,000 - "Tempting The Wary..."

DJIA at this level is really in "Nowhere-Land". It could go either way, theoretically. The next resistance level is the April 2010 high of 11,200.  It just makes you wonder, whether the index will fall as precipitously as it did after this year's April peak, or whether it is caught in a renewed "reflation" exercise, a repeat of April 2009 to January 2010! (see graph below)

This beige shaded period shows an upward move that contrasts sharply with the DJIA Supercycle. The Supercycle suggested that a correction was due after August '09. It did not happen for DJIA, nor did it for most other markets.  Indeed, the only equity market that did correct was Mainland China. Will we see a repeat of such a reflation effect NOW?  
 
Short-term pattern tend to drive sentiments towards extremes such as we saw last week. It is too early to speculate what exactly drives the latest advances. We are fed old buzzwords like "stock markets rise on a wall of worry". Stereotypical comments do wonders in a raucous discourse at the pub but little for the real issues.

What's Real?
With every passing day that extends the Indian Summer rally, the temptation for investors mounts to take action.  Now, it is no longer about events in the markets, the direction they have taken or the level they are at.  It is all about STRATEGY.  
A worthwhile strategy comprises of a well thought out, disciplined and effective plan catering to what you as an investor want to see happening in your portfolio.
If you do not have a strategy, you are more likely to be swayed by wild swings in opinions thrust upon you by media coverage and short term analysis, always focusing on a potential, coincidental event around the next corner.
Quick Recap
Following another blistering 6% advance in US stocks between late August and early September, our strategy (ProActiveManagement) demanded that we forgo the hypothetical continuation of a September rally beyond the 10,500 level. This was reached in the first week of September. It was a question of protecting the portfolios' solid outperformance of about 10% above the MSCI World Index YTD.
3-month Chart - Comparing selected bond funds versus S&P 500

Reducing equity holdings in early August resulted in most portfolios enjoying less volatility without necessarily missing out on performance. That is despite rallying markets as the following charts show.

During this period, Asian bonds outperformed most other asset classes of the market spectrum we are watching.  Global Bond funds, too surprised many observers.  Compare that with the highly volatile, - and in S$ terms unprofitable - S&P 500 line.

This strong performance in bonds versus global equity is just as pronounced in the one-month chart.  Despite their run up, equities muster only a meager 1% advantage.

However, we find ourselves at the most critical point in this Indian Summer rally now: Any more advance from current levels after today's sympathy move (?), and we are faced with a much more bullish potential.  


Could we see another "reflation exercise" preventing markets to correct to a healthier, more sustainable level yet again?  Ahhh.  That is exactly what I dread.  Why do I not welcome it?  Markets are just simply way overpriced, and miles ahead of economic realities. 


What Now?
I give the markets another 3 trading days (including today, Monday 11 October).  After that we will have to see whether the governments' printing machines are taking over our asset valuations.  Sure it looks "cute" when gold and commodity prices go through the roof ("WOW, the economy must be booming!").  But it ain't real.

  • If markets continue the rally, then we might be in for an early stretch of the year-end rally. - It is possible, but not my preferred scenario.
  • Ready to pounce on a rally created by extra trillions being thrust into the market place? 
  • Ever heard of diluting the value when you issue new stocks? This is the inverse version: The value of your money is being diluted making real assets look more expensive, precious, sought after. 
  • Would I buy? Of course, - we have to keep up with the Jones.  But it does not make my heart race! It feels more like a migraine that just won't go away...


    In the end ...
    Since we are all expecting  - something different, I will have no choice but to recommend a few more days on the sidelines.  Make no mistake: our portfolios are well positioned for a correction, but not so great - IF- if markets take another 6-10% hike. 

    Patience! I will report back midweek.

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