The post-election weakness was NOT the start of this current correction. The top of the good stock market action occurred on September 14th, after which most stocks started to act queasy in the next two trading days. On September 14th, we had a strong rally in the price of industrial and precious metal commodity prices, a weak dollar, a strong euro, an increase in bond yields, and a strong stock market. It wasn't our ideal stock market, since we saw some dysfunction in the quality of the rally, but still most stocks were making new highs.
The headlines like to find specific events, and they don't really follow the evolution of events. Trends don't just turn on and off, they evolve. In some ways, this 2012 stock market never did act as if it was going up because of improving economic conditions, but instead, it went up because there was nowhere else to turn. Yet now, we're seeing the camouflage disappear, and they are now blaming it on the post-election time period, and now turning it to the next headline...the looming fiscal cliff.
I'm an optimist, and I believe that the stand-off and new humility of the politicians will force a solution and end this gridlock...and produce a re-enactment of a bull market in which economically sensitive stocks will lead the parade. As we've been suggesting for a while now, our short-term outlook for the stock market has been cautious. However, the stock market has put up a mighty camouflage, with the S&P 500 hanging in staying close to its most recent high until about three weeks ago, but now the clouds have been removed and we're seeing the moods starting to evolve. Our Asset Allocation Model remains in the long-term bullish, short-term cautious stage, and today, our mood is still just "not there yet."
The next few months may continue to show a little camouflage, but for us to turn our full green light back on for the short-term, we will continue to wait on some improvement from our Psychology Composite, which as of today, still remains at P4.
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