Last Friday morning, November 16th, may have been the intermediate-term bottom for general equities and for most ETFs. It was an opportunity to add to positions in order to be fully invested in preparation for what appears to be the strongest and the last leg of the bull market that started late 2008 and early 2009. Last week’s worldwide rally was decisive and strong with low volume – meaning that amateurs are not the buyers. It is the experienced traders that are getting positioned.
An important leading indicator, the US dollar index, dropped sharply last Friday. It had struggled for two weeks to stay above 81. This may be the beginning of a retreat for the greenback during the next few months. The result will be higher prices for risk assets and particularly strong gains for commodities. We expect the US dollar index to settle around 75.
Insiders, as usual, take action near extremes – which is in general the way we buy and sell. You may find this recent article from Mark Hulbert interesting to read: Insider behavior points to imminent rally.
Regarding the bond market, the U.S. Treasuries are much overvalued, especially the long-dated ones. We expect the safe-haven ETFs to experience a substantial decline as investors shift from safety toward risk within the next few months and jump on the bandwagon for pure greed, which is the usual “buy high-sell low” mentality.
The fear of the Fiscal Cliff is causing the biggest exodus from U.S. stocks. The herd investors are just piling into bonds and money market funds. The US Congress will come up with a compromise and the market will have a powerful rally. Since most investors don’t have the emotional strength to buy into weakness, they all get in after the trend has been fully established and the financial media is full of bullish articles. It is called buying high-selling low.