This is the monthly WealthProtect System* status update and includes the probability (Low, Mid, High) of a change in status within the next two months. Below is a commentary on actions taken this month as well as changes in overall asset allocation.
There were no trades in our system this month. US large cap equities continue to show strength, as do foreign equities. US small company stocks, however, have been pretty much flat since the turn of the year and this has brought them closer to exiting. Commodities, on the other hand, have shown renewed strength.
As I write this on the 10th in the midst of the North Korean situation, the market is having one of its few serious down days this year. This has been, however, quite a Teflon market. Nothing so far has seemed to bother it. Many seem to think this bull market is strong. Let's take an honest look at the bull market. As my friends at Hays Advisory** point out, a bull market, like a good table, has four legs-the trend, valuation, psychology, and monetary conditions. How solid are the legs? The first, the trend, is in fine shape as far as the major averages go. This leg is strong. The second, valuation, as I have mentioned numerous times, is at extremes not seen since 2000. In fact, most measures of valuation imply that it will take a drop of at least 48% to bring the market close to fair value! So, this leg is gone. Now, valuation does not tell you when a bull market will end. Valuation tells you how much capacity there is to the downside once a bear market begins. The third leg is psychology. Rarely have I seen such a complacent market. The S&P 500 hasn't even had a 5% drop in over a year--the longest period since the early 1990s. Add to that a host of other measures, including record-high margin debt, and it is difficult to escape the conclusion that psychology is bearish at this point. This leg also appears to be gone. The final leg is monetary conditions. Most bull markets end when monetary conditions sour. This leg is still intact, but is wobbly. Close observers of the yield curve will have noticed a flattening. While short-term interest rates are certainly still low, their trajectory from the Federal Reserve is on the rise.
Therefore, we have a table with one strong leg, one wobbly, and two that are missing. A two-legged table can still stand, but it is shaky and it won't take much to topple it over. This is a good time to check your asset allocation and to make sure the amount you have exposed to stocks is inside your comfort zone. Give us a call if we can help.