‘Risk On’ for Now

financial freedomMy Comments: Continuing with the theme that if you have exposure to the markets you need to be very careful, here is another metric from someone who knows how to read the tea leaves.

I’m reluctant to continually use fear to motivate people to act. But if you are not now in cash, then you need to be able to move to cash quickly. As an added benefit, if you also have the ability to move further and make money while others are losing theirs, you just may come out the other side as a happy camper. At least that’s the plan.

November 07, 2014 Commentary by Scott Minerd, Chairman of Investments and Global Chief Investment Officer – Guggenheim Investments

Last week’s investment roller coaster was something we had been expecting—U.S. stocks delivered their usual bout of seasonal volatility right on cue. For now, recent spread widening in high-yield bonds and leveraged bank loans seems to be over, and it also appears that equities have regained their footing after a turbulent week.

With the anticipated seasonal pattern of higher volatility in September and October now largely fulfilled, we anticipate more positive seasonal factors over the next two months. Over the last 68 years, the S&P 500 has averaged monthly gains of 0.9 percent in October, followed by even stronger increases of 1.2 percent in November and 1.8 percent in December.

The current dark cloud that hangs over Europe is a serious threat and something that investors should closely monitor. If the anticipated seasonal strength—which is typically driven by an influx of cash into pension funds that their managers are keen to put to work—is not forthcoming, investors should seriously question how much further the current bull market can run. As of now, we remain cautiously optimistic as we await some crucial economic data.

Chart of the Week

Can U.S. Equities Sustain this Rally?

Despite the Dow Jones Industrial Average high made on Nov. 6, the New York Stock Exchange Cumulative Advance/Decline line remains 1.1 percent lower than its peak on Aug. 29. Historically, a persistent divergence between the DJIA and the Advance/Decline line usually leads to a major correction in equities. Whether or not the Advance/Decline line can catch up with the increase in equity prices over the next few weeks will determine whether the current rally is sustainable.