What is Holding the Stock Market Back?

I have to admit it, I'd rather talk about the Dow Jones Industrial Average hitting that important high yesterday.  We've made great progress gaining back those losses of the financial collapse, and earnings have moved to all-time highs, but the Dow Jones Industrial Average is not representative of the average US stock.  What is it representative of?  It contains 30 of the most highly liquid (trading volume) stocks in the US, and in most cases, in the world.  So...if you are sitting out there with a trillion of some currency, and you recognize that stocks are the only game in town, and even more that the leader of the world's parade is still far and away the United States, what do you do with that monstrous wad of cash?  You buy the Dow Jones Industrial Average, which puts US stock investors in a special sweet spot.

This message is very close to what our Asset Allocation Model has been letting on about, and with the Federal Reserve still very, very open about their conviction to continue to provide ample fuel to not only prime any business that needs extra incentive to get cranking, but to continue to reinforce our financial network, it is certainly enough to convince the largest pool of assets that are roaming the world looking for a home.  And I believe the stock market, and even more ao, our Asset Allocation Model and Market Trend Analyzer, is suggesting we are in a powerfull bull market...and there is MORE to come.

That is the long-term trend, which is the important one, but here in the US, as we look at all the parameters, we see our Asset Allocation Model's Monetary Composite at M2, while just barely into that range still close to its most bullish level of M1, and our Valuation Composite continues to suggest that large-cap stocks (as measured by the S&P 500) are as cheap as any time in the last 32 years, only excluding the period from 2009 to now. 

However, there is always a "but" isn't there?  So let's discuss that factor.  Our Psychology Composite is ratcheting back and forth between P4 and P5.  And today...after the rally of the last few days, we see that Psychology has dropped back to P5.  Our Rydex Asset Ratio is a good example of why this has occurred.

Our adaptation of the Rydex Asset Ratio has been a fantastic indicator.  You can see why from just the action in the last few years, and now, it is flashing the same levels that preceded both the 2010 and 2011 corrections...and those were tough times to endure.  The bottom line is that conditions such as we have now set up a scenario in which markets (or at least stocks) usually don't do a lot in the next few months. 

So how do we interpret this?  We continue to find the next 12 months to be very positive, but for the next three to six months, there is actually a little more risk than potential.

Don Hays

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