The Inter-Phase Period

Look at the compass, and chart your course.  Last week we had Psychology at P4 and Monetary at M3, as the 2-Year T-Note yield had blipped up and temporarily pushed Monetary into that range.  With Valuation so Undervalued, our Matrix told us to "maintain our previous cash allocation, not to exceed 10%."  Today, we got a little relief as the oscillation of the 2-Year T-Note yield calmed down some and caused our Monetary Composite to tip-toe back across the M2 threshold.  But the message is still very similar in its discipline: "0% Cash." 

On Friday we discussed a "changing of the guard."  This was a description of sector rotation.  But as we look at our Matrix today, and the trends in many of our Psychology Composite indicators, we do believe that subject also has some application to the stock market indices.  Since the market bottom of March 2009, the S&P 500 has moved from 666 to a high of 1277, or an upside of 92%, while at the same time, the S&P Mid-Cap Index has moved from a low of 397 to 924 for a move of 133%.

We are a big mid-cap advocate, but if you are trying to talk broad strategies, we have to admit that mid-caps have been so fantastic and large-caps, with all their well-advertised baggege, have really been in the dumps for the last decade.  The bottom line is, in the next few years, we should start to see some very definite improvement on a relative scale in the S&P 500 (larger caps).  Historically, small and mid-cap companies have a higher growth rate of earnings, so this doesn't mean to forget mid-caps, but it does mean that the good large-cap companies will start to "keep up."

To view today's complete Market Comment, click here.

Don Hays

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