Market Hesitation, Dividends, and the Fall Catalyst
Following the Summer Surprise, the Fall Catalyst of new all-time highs seems likely, but only if we get past this period of market hesitation.
All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident.
-- Arthur Schopenhauer
I've been noting in some of my more recent writings that while I remain broadly bullish on equities following the Summer Surprise / "end to the end of the world trade," intermarket relationships do appear to be hesitating around important price ratio levels. As we close out the third quarter, it could very well be that some defensive positioning is underway as traders and portfolio managers lower overall risk, given the potential for poor headline news on the global front to resurface.
However, should this moment of hesitation pass shortly, I do believe the Dow (INDEXDJX:.DJI) will hit new all-time highs, which would serve as the "Fall Catalyst" to accelerate fund flows back into stocks by the retail investor who has largely missed out on the broader move up.
My firm's ATAC strategies used for managing our mutual fund and separate accounts appear likely to meaningfully reduce exposure in equities in favor of bonds once again come Friday, until more clarity occurs. One of the more troubling signs in the here and now is the price behavior of dividend stocks. Take a look below at the price ratio of the SPDR S&P Dividend Index (NYSEARCA:SDY) relative to the S&P 500 (NYSEARCA:IVV). As a reminder, a rising price ratio means the numerator/SDY is outperforming (up more/down less) the denominator/IVV.
Generally, when the trend is up for this ratio, it coincides with a corrective period as money flocks to the "safety" of lower beta, higher dividend-yielding sectors of the market. When the ratio trends down, it means money is favoring capital appreciation and higher beta names. I've drawn in a horizontal line to show that we are near a rough support line favoring dividend stocks, and to illustrate the strength that has occurred in recent days. I suspect this may not be the start of another rough period for equities and that this may simply be an oversold bounce.
However, in the near-term, this could be a warning sign of a potential correction to come. If deterioration within the market does not worsen, I suspect the Fall Catalyst takes place shortly.
And yes – the next few days are crucial.
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