Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Trading Lessons: Respect Market Momentum


Managers may feel virtually "forced" to jump into the market if it continues to rise.


Editor's Note: The following was posted in real time on our premium Buzz & Banter (click for a free trial). It's being shared here for the benefit of the Minyanville community.

Readers might recall that back in March (See: Is a Countertrend Rally Inevitable?), I mentioned that the countertrend rally I was expecting would be focused on out-of-favor, economically sensitive sectors such as financials, materials, consumer cyclicals and energy. I predicted that the strength of the moves in these sectors would be based not only on upside economic surprises, but the fact that portfolio managers were way underweight these sectors and would have to scramble to get their weightings in these sectors up in order to avoid drastic underperformance.

In this context, it was very interesting for me to note Bespoke's report today showing the latest breakdown of institutional weightings. The report shows that today, institutions are overweight financials, materials, consumer cyclicals, energy, and industrials -- all economically sensitive.

Funny, isn't it, that these sectors have all of the sudden become so popular after massively outperforming the market last quarter.

Now, take a look at consumer staples, utilities, healthcare and telecom -- all underweight. Remember when, in March, all the financial pundits were telling us that we needed to be long the defensive, high-dividend-yield stocks to ride out the bear market?

Well, all of those sectors massively underperformed. Now nobody wants them.

I think that this about-face in institutional sector allocations is as classic a contrary indicator as one can get -- and one with very important economic and financial markets implications: With institutions massively overweight economically sensitive sectors, how many further surprises can we expect on the economic front?

On a side note, I was heartened to see that technology is the second most underweighted sector. I am most bullish on this sector myself.

Now, with all of that being said, remember, that even if we are in the last stage of this bull market, this last stage could be worth another 10%-20%. One must be careful.

Look at the 2-year chart of the S&P 500 if you need more convincing. Above 1,010, the path to 1,200 is clear.

Thus, I am currently neutral. However, I will become constructive with closes above the 1,010 area. I will only get progressively more bearish with closes below 1,000, 990 and 980 areas.

On a final note, the disappointing news on retail sales (see XTR, ANF, WMT, GPS) should have caused a major sell-off. It was ignored. The news on the surge in foreclosures should have caused a downside bias in the market. Instead, the market bought the banking sector (see BAC, RF), which is the most heavily exposed to these foreclosures.

The lesson? Respect momentum. Respect the cash out there. And respect the situation I have continually alluded to, in which managers may feel virtually "forced" to jump into the market if it continues to rise.
< Previous
  • 1
Next >
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Featured Videos