We certainly don't want to count our chickens before they hatch, but admittedly, we always hope that our Asset Allocation Model pinpoints exact bottoms and exact tops. It does sometimes...and then other times, we have to sweat out a few months of volatility as the stock market's infrastructure has to build that solid launch pad for the ensuing upsurge.
To summarize the transition that we've seen take place over the past few months, on March 31, 2011, our Monetary Composite edged down a level to M2 (from M1 - the best level). That was not alarming, but it took a little of the sizzle off the table. Also, around the same time, our Psychology Composite moved to its worst level of P6, which was signalling to us that the essential "Wall of Worry" was crumbling. But i'll reiterate, these messages were NOT bear market signals. Instead, for the first time since this bull market started, the optimism of those buying and selling stocks had turned into "too much optimism."
Yet, today (as you can see below) we now have our Psychology Composite at P4, which moved from P5 on June 13th, and our Monetary Composite has moved back to its most bullish position of M1 as of May 23rd. And as you remember, it was that signal on June 13th that moved our Asset Allocation Matrix to it's most bullish position, as it told us that we should go back to a position of maximum bullishness for stocks and have minimum cash in our portfolios.
With the full knowledge that sometimes such a signal is a starting gun for a strong move upward in the market, while other times it's a signal that it's only the beginning of a patience-trying bottoming formation, we pulled the trigger and moved back to our fully-invested posture. It is always a trying period. It's never easy to buy stocks when our Asset Allocation Matrix tells us to. One of the most accurate market truisms for good investing is: "If you are not sweating when you buy (or sell) stocks, you are most likely doing the wrong thing." So, we sweated.
The bull market is still alive and well, and the public investor has not even started to feed the flames yet, but they will. As of now, they are not sweating...but you don't have to sweat when you're buying money market funds or T-bills. Just remember, "if you are not sweating, you are probably wrong!"
As you know, we are investors, not traders, and we believe that it is the combination of Monetary, Psychology and Valuation that creates and sustains bull markets. So, until that combination starts to give us yellow caution lights, we will remain bullish.
To read today's full Market Comment, click here.
Please see important disclosures at the bottom of this page.