The last email blast in July was titled “Too Bearish on Equities?” Our analysis was suggesting at that time that the overall sentiment of novice and professional investors alike was that we were due for a second leg down in the markets. Since then the S&P 500 and the Dow are both up 15%.
A 4% decline in the indexes over the past two weeks has re-ignited the pessimistic viewpoint that the economy in the U.S. and the world has stalled. Yet today Australia became the first country to raise interest rates – which may signal that the global economy is growing faster than it is being reported. Too bearish once again?
This week marks the beginning of the quarterly corporate earnings cycle. We feel that the reports will be mostly positive when compared to last year’s disastrous results. While this will be positive headlines for the media, October still has a history of setbacks in the markets. Caution is in order. If we do see any selloff this month, we think it will be used for buying by the many professional money managers and hedge fund managers that have missed the exceptional run-up the past six months. As year end approaches, these managers cannot afford to report large cash positions in their portfolios in an up market year. Their bonuses and even their jobs would be in jeopardy. In addition, the fact that there is currently enough cash on the sidelines to buy the entire S&P 500, points to an excellent argument that stocks will be higher at year end than they are now.