Market Psychology Deteriorates to Lowest Level

The headlines are clear—strong first quarter stock performance! We agree!  It's exciting and exhilarating.  We have enjoyed our fully invested mandate since the Market Trend Analyzer recommended putting cash back in the market on April 17, 2009.  And then a little over a year ago on March 2, 2010, the Market Trend Analyzer gave an all clear signal and said it was time to focus our analysis on our Psychology, Monetary and Valuation Composites. 

In recent months, we've described our Monetary and Valuation Composites in elaborate detail, and we've shown the historical stats that show today's market to hold huge long-term potential.  But admittedly, since September of last year, we've been seeing some small temporary clouds on the horizon for our Psychology Composite.  We've felt (and hoped) that the recent correction would dispel those clouds, but the bottom in the market on March 16 came very quick, and the sharp snap-back rally into the quarter's end was extremely fast.  In fact, this snap-back has pushed our Psychology Composite from its recent "slightly improved" P4 rating to its lowest rating of P6 this morning.  You can see our current Asset Allocation Model gauges below.

But once again, you have to put this weakened Psychology rating in the context of our current strong Monetary and Valuation readings.  However, we still think that the most likely course of action would be a more extended correction—one that would improve Psychology back into a neutral to bullish posture.  We would expect any correction (if it does occur) to be very moderate—supported by the strong posture of Monetary and Valuation.  And with the quarter ending now and earnings due in just a few weeks, the earnings reports and any suggestions of "more moderate expectations" from corporate leaders could produce our desired improvement in the Psychology Composite.

But for now, we'll have to be a little patient, and see how this deterioration of Psychology plays out.

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

Don Hays

Please see important disclosures at the bottom of this page.