Monday, August 20, 2012

Getting bullish, but first wait for a pullback

I had written before that I was seeing signs of healing in global markets, except for the US (see What to do for the rest of 2012). With the recent strength we had been seeing in stocks, I am now finally seeing signs of a bullish resolution to the risk-on/risk-off trade.

Consider the relative performance chart of the Morgan Stanley Cyclical Index, shown in black, and the relative performance of Utilities against the market show below. Recently, cyclical stocks have staged a bullish reversal while the defensively oriented Utilities sector has staged a bearish reversal on a relative basis.

Wait for the pullback
Despite the bullish underpinnings for the risk-on trade, I wouldn't get too excited today just yet. Many of my short-term indicators are in deeply overbought territory. While the intermediate term trend may be up, I would be patient and wait for a pullback before committing fresh funds to stocks.

The macro environment has been relatively positive for the last couple of weeks, but we remain in a seesaw and volatile environment. With a generally positive backdrop seen in Europe, the market is setting itself up for disappointment and could hit an air pocket at any time. Possible triggers include more talk of Grexit, likely disappointment at the annual Jackson Hole meeting over pre-announcment of more quantitative easing and possible disappointment over the August NFP, as Gallup has shown deterioration in their unemployment surveys.

My inner investor is getting ready to average into stocks over the next few weeks. My inner trader wants to wait or even raise a little cash here in preparation to buy when the correction hits in the days ahead.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.

1 comment:

Anonymous said...

how about an update on your inflation timing model?