When we left off on October 30th, I posted an interesting study that pointed to the markets being a screaming buy, with an average gain of close to 17% over the next 12 months. Being that we are up roughly 10% since the study was posted, I thought it would be appropriate to post a follow up, along with some relevant notes.
Let's start off with a philosophical discussion: Bull markets are meant to be invested in not traded. There is more money wasted and opportunities lost by investors who simply attempt to avoid the pain of a pullback in a bull market. The pain and pleasure of the ebbs and flows of bull markets shouldn't be avoided, but rather, understood. The understanding comes in the form of observing the natural tendency for markets to correct while knowing a correction does not constitute a secular reversal.
It has been 6 years I have been telling any investor who would listen that this bull market should be bought and embraced for sometime to come. That message has not changed and it will not change at any point on the near horizon. There are still multiple years of gains ahead, into the end of this decade and perhaps further. In fact, the upside from here remains on par with the potential I saw in 2011, when the Nasdaq was at 2500.
In the meantime, the markets are at a complicated inflection point. We are up against some substantial resistance areas but sentiment is just beginning to turn into the bullish camp on a long-term basis. Typically when that sentiment turn occurs there is a prolonged period where what is obvious becomes obviously right. In other words, contrarianism fails while consensus excels. That was the point I was attempting to convey in the article from October 30th, titled An Unorthodox L0ng-Term Indicator Is About To Scream Buy
Going back to the same indicator mentioned in that article, the 260 and 600 day moving averages of the put/call ratio, you can see in the chart below that the crossover just happened. Again, this indicates we are entering into a period when consensus bullishness will prevail much to the disappointment of contrarians:
Next up, we have the Dow, which has broken out above a key trajectory point with this recent run since November. This is a very real breakout with significant ramifications. This is the beginning of the second leg up for this bull market that has the Dow moving much higher over the next 2-3 years.
The stick in the wheel comes in the form of the Nasdaq which is camping out right at a significant point of resistance pictured below. This type of sideways volatility we have been experiencing in recent weeks could last for some months to come, although I expect the markets will fool investors into thinking that its up and away to the races post-election in the week or two ahead. It's probably a good idea to remain cautious buying into big runs until more digestion occurs:
In summary, exposure should remain high to equities for the foreseeable future, with expected volatility taking place in 2017. Some cash reserves could come in handy to take advantage of the increased volatility I expect this year. The long-term trend remains up and I expect that trend to remain intact for years to come. Those who take a long-term perspective to their investments will continue to fare the best.
