Do Yields Matter? 5/23/07 11:0 AM
According to our Global Investment Strategy service, equities momentum might look stretched, but waiting for a correction is likely to prove too costly. While many technical indicators are warning of a correction, the global equity market has continued to grind higher aided by an avalanche of liquid public savings moving into stocks. Recent market behavior resembles that of the second half of the 1995, when the Fed went on hold and share prices escalated. During this episode, stocks consistently looked overbought and ready to correct, however, a sizable pullback only came in 1998. Waiting on the sidelines proved extremely costly. This leg of the bull market is typically both rewarding and volatile. Correspondingly, investors should stay invested but consider an insurance strategy. Bottom Line: The market is overbought but a hard correction is unlikely. Hedge potential volatility, but stay long. -- BCA Research 5/22/07
That time frame -- 1995 to 1998 roughly corresponds to that period I've talked about where the public could not accept that equities had bottomed after The Maestosity's rate hiking campaign ended in late 1994, and their shorting and disbelief fueled the first leg of the 1990's bull market.
So I think BCA is probably right and a deep correction doesn't look likely right now, but this breakout in T-Bond yields - whether you look at the 10 year of 30 year -- has the potential to usher in some kind of vicious horse whipping if it continues into the 5% area.
Meanwhile,yesterday the Russell 2000 finally broke out, and I also see that the S&P 400 Midcap is now up 5 straight days while the bigger caps fade a bit.
And then you've also no doubt noticed that the Steel stocks and some of the other stocks that used to be cyclical are fighting for position around the gas pipe.
Is there something going on here? Probably too early to say, but keep your eyes open.
Also noticing that the current 52 Week Rate Of Change (ROC) -- over 20% for the Dow and S&P 500 -- is traditionally considered an overbought point I remember BCA Research saying in the past, but they apparently don't think it's too important this time.
Meanwhile, the broad market rolls on remember that the process of a top can go for a very long time, and I don't think we're near the tipping point yet because anecdotally I just don't have people asking me about the market like they did in 1999-2000
Obviously that's very imprecise calculation and I could be wrong..
On the other hand I'm also struck by Richard Russell's conversion, and maybe we need to see Crazy Freddy convert, although I think he'd take Art Samberg and the rest of the Roundtable hostage and refuse to go out alive
Bottom l ine is that I am leveraged long, with a few out of the money puts underneath
Stephen
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