3/27/2022 Update
Mixed Signals
The first thing to notice is that the sector ratios are
extremely bullish. The current call on
the sector model is Consumer Cyclicals, with Financials as a possible
replacement in the near future. These
are most typical of a market bottom instead of a top. At the very least they show a rally to be
likely over the next two months.
The rotation in Industries has been quite vigorous as
well. But the results are mixed. Of the best Industries a third are neutral, a
third bullish, and a third bearish. The
full model will be rotating into a more defensive sector on Monday while the
sector model is screaming optimism.
And, although we won’t be buying into the Cannabis Industry
this week, the fact that it’s in the buy zone is a strong metaphor for what I’m
seeing in the models.
So, we are optimistically buying pessimistic stocks.
Wars, rumors of wars, and inflation will do that.
Speaking of inflation, the spike in interest rates has
created a scare in the bond market. In
our opinion, bonds should be bought to hold to term, rather than traded in
interest rate speculation. Buy and hold
a bond for what it is, rather than what it might be.
That said, the current environment of predicted hikes in the
interest rate project that now is not a good time to buy bonds. The idea is that if interest rates are going
up then bond values will go down. For
traders and speculators, that’s bad.
What about for holders?
The current rate on the ten year is 2.48%. The dividend rate on SPY is half of that,
leaving us with two questions:
1)
Is inflation going to be less than 2.48% over
the next ten years?
2)
Is SPY going to have an annual return less than
2.48% in combined growth and dividends over the next ten years?
It’s understandable that at a certain age one wants to avoid
risk. Stocks always carry short term risk and currently bonds are almost a
guaranteed long-term loss.
The present bullishness in stock sectors isn’t necessarily
from a structural strength in global stability during a crisis in Eastern
Europe. Rather, it simply could be from
the fact that the other options are worse during high inflation and rising
interest rates.
Hence the mixed signals on the model.
The model doesn’t time.
It rotates between sectors and industries to find the most promising
stocks even in scary times. We want to
go up more than the average stock in good times, and go down less than the
average stock in bad times.
The current positions in the small model remain unchanged:
·
EA
·
JNJ
·
ZBRA
·
TTEK
·
DDAIF
