Is Psychology beginning to improve?

In our shop, we see the powerful Monetary reading and the Extremely Undervalued stock market in conrol of the major trend.  Over the past 8 weeks (or so far this year), the economic news has driven those "Double Dippers" back in their caves.  The heard has spent the better part of two years worried about the "worst recession since 1932," the bank stocks, and the "short-term rally in a secular bear market." 

But as we entered 2011, those concerns started to melt away.  We've seen very health ISM readings, improving existing home sales, good consumer sales, fantastic corporate liquidity, a favorable "business-oriented" election, and now we have "freedom seekers" all over the Middle East rocking those horrific human rights violators from their thrones.  Essentially, the worries of a year ago have been neutered. 

The main message this morning is that we expect a long-term bullish stock market.  While the strong Monetary and Valuation levels are supporting our Asset Allocation Model's suggestion of a fully-invested position, our Psychology Composite is leading to about a 10% deviation at times based on juntures when it moves to P4 or a weaker level of P5 and/or P6.  Almost always, these junctures are triggered, and even though you start to see "internal" weakness in some sectors fairly quick, the overall indices can continue to climb - sometimes for a few months.  But almost always, you eventually get that "repair of the Wall of Worry."  The key word is "eventually."  And the longer until that "eventual" point, the harder it is to trust the Psychology Composite reading.

We have now had two measly days of correction, but it does appear that the "eventual"  is here.  We hope so.  Remember, our underlying strategy is that we want to be fully invested in equities in our growth accounts, so we are "craving" a correction in the stock market that will pull our Psychology Composite back to at least a P3 rating. 

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

Don Hays

Please see important disclosures at the bottom of this page.