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Breaking Away

January 24, 2013

by Jerry Wagner

of Flexible Plan Investments

Is there anything prettier in sports than when a basketball player steals the ball and breaks out beyond the defense? He or she flies to the basket and leaps in a seemingly effortless glide toward it. With hand outstretched, the ball ascends and then drops through the hoop, and SCORES.

With the college and the NBA seasons now in full stride, these breakaways are on full display every day of the week and most hours of the day throughout television land. Not to be outdone, the stock market staged its only breakaway last week as it broke out above its post-correction high and scored a new market-rally highpoint.

As the chart illustrates, this has been a hard fought victory. The market made the just-broken highs back in September. Since then, uncertainty sustained by an election and impending fiscal cliff had formed a nearly impenetrable defense. But once that was behind us, the offense took the ball to the hoop and scored.

Source: Bespoke Investment Group

Now what? We’ve once again inaugurated a President, the Republicans are once again signaling that they are willing to compromise (this time on the debt ceiling), earnings are better than expected (but less than half have been reported), and as the next chart shows, interest rates are falling once again. The trend follower in me questions, “Can we ask for anything more?”

Source: Bespoke Investment Group

Unfortunately, the contrarian gene is also present within me. Aren’t the markets overbought? Yes, but they can stay that way for a very long time. Won’t the lower interest rates lead to inflation? Yes, but they have been low for a very long time and inflation measures reported last week were actually weaker than expected.

Doesn’t the next chart demonstrate that investors are less bullish? Yes, but a decrease in investor sentiment is actually bullish historically for the market, and sentiment never reached the lofty 50%+ area that often signals a major market top.

Source: Bespoke Investment Group

What it all comes down to is that we seem to be in one of those periods where the market climbs a wall of worry. For every negative there is a positive, and vice versa.

The only thing that really matters is that stock prices are moving higher and the uptrend is an investor’s best friend.

You could be the lucky trailing guard who races down the court behind the breakaway player (like Piston’s forward Tayshaun Prince did when he sprinted down court against Indianapolis in Game 2 of the Eastern Conference Finals playoffs to block a breakaway layup by Pacer’s star Reggie Miller that would have tied the game) and you can make the unlikeliest of plays. Or you can watch and appreciate the pretty breakaway and stand and cheer… until the tide turns the other way.

Right now the bulls are leading the charge and Flexible Plan’s strategies and funds have been participating fully – our targeted volatility indicator is actually at its highest possible reading (300% bullish on the NASDAQ 100). Let’s enjoy it while it lasts, knowing that a stumble is possible even from a front runner but that our computer models are programmed to stick with the market’s most likely probabilities.

All the best,

Jerry Wagner

© Flexible Plan Investments