The tide comes in...and the tide goes out, and today, the tide has turned...at least momentarily. Only a few weeks ago, our Psychology Composite (then at P5) warned us that the tide coming in was close to high tide. But then this week, our composite moved back to P4. And if you remember from a few weeks ago, our Monetary Composite moved from its best level of M1 to M2, which told you exactly what the newspapers are tellling you today - the Fed is no longer staying up all night priming the pump. Instead, the Fed sees the economic pump starting up, so they are backing off on that QE3 that the world was so sure was on the horizon.
So now we know that P4, M2 and V1 (our Valuation Composite remains at its Extremely Undervalued level) are suggesting that we are seeing the tide just starting to go out in Psychology and Monetary Liquidity. However, this is not a rip tide. Some of your best beach time is ahead, but you can probably expect a few dark clouds to appear - just enough to scare some of the recent beach-comers that have crowded out your beach to start scrambling for cover.
Yet, we do feel some slight breezes that could clear the air. If you notice, when the market sentiment really gets going and some cracks start to appear in the healthy "Wall of Worry," the more aggressive traders come out of hiding and begin to trade. Since the NASDAQ is a little more aggressive in the trading arena, we measure (and adjust for changing exchange patterns of increasing or decreasing volume) the ratio of this aggressive NASDAQ volume to that of the more conservative NYSE volume, which becomes a decent market indicator. You can see in the chart below that only a few weeks ago this indicator moved up to the red line.
This is not always an ominous signal, but just a proxy for what we are saying. It is a time to walk slow and make sure you are getting your desired stock at the right price - selling at good solid support levels.
Again, the next indicator works sometimes - actually fairly often, but not perfect. But with these signs that the tide has to move out to come back in, we are guessing that the blue line (McClellan Oscillator) in the chart below will come back close to that -100 line again.
Do not mistake this as any sign that our Asset Allocation Model has turned negative. The 12-month potential is still very substantial and continues to suggest that we maintain maximum exposure to stocks. The only message is the same one we've been giving for 4-6 weeks, just walk a little slower in chasing the bulls. They may rest for a while.
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