Market In Rally Mode

Written by Dave Young, President of Paragon Wealth Management
Taken from Paragon's 2Qtr 2012 print newsletter

Stock markets around the world rallied strongly during the first quarter of 2012. After the extreme volatility last year, many investors abandoned ship and headed for the hills...just in time to miss this entire rally. The irony is that selling to "protect" actually cost them dearly.

This rally has confounded many.  Market experts have called for a selloff ever since last November.  In the face of all their pessimism this market has steadily trended up.  Every attempted selloff has been met with new buyers coming into support the market. 

In unusual fashion, surprisingly, the market trended up, even as large amounts of money moved out of stocks and into bonds. Unbelievably, against that backdrop, the broad stock market indexes had their best first quarter performance in 14 years.

Why?

According to the sentiment models that we track, last fall the majority of investors were very negative and believed the market was headed down again. Often, when investor sentiment gets that negative,  everyone who is likely to sell has done so.  At that point, the market is like a powder keg waiting for a spark to set it off.  Once the selling is exhausted and you start to see some positive news , then the market will usually take off.

The good news that ignited the market was that our economy was stronger than expected, Europe didn't go down in flames after all and corporate earnings continued to be strong.  Market volatility declined and consumer confidence came in the highest it had been since 2007.

 What's Next?

While nobody really knows what will happen next...there is a good case to be made that this market has more room to the upside.  Market indexes are still below where they were twelve years ago while corporate earnings are about three times higher than they were then.

As the market moves up, it has a wealth compounding effect on the economy.  Investors cash out some of their market returns to replace an older car, buy a new house, remodel their home, make other large purchases or go on vacation.  This money from stock gains goes into the economy further benefitting the expansion.

As investors gain more confidence in the economy they will likely become weary of earning virtually nothing on their money markets, bank CD's and bonds.  The ICI reports that there is currently $2.6 trillion invested in money market mutual funds alone.  Much of that money will likely start to move into equities in search of higher returns if the market keeps moving up.

Housing prices declined for the fifth consecutive year in 2011. This economic recovery has occurred without any help from the housing industry. Industry experts are currently forecasting flat housing prices for 2012. A stabilization in housing prices should have an extremely positive impact on the stock market.

Our models indicate that this current move up potentially still has room to go.  As this is being written, the first week of April, the market seems to be taking a break.  We are getting close to the previous market highs which usually provide significant resistance.

 Sentiment has moved down from the extremes high's of a couple of weeks ago.  Ideally, the market will continue to move sideways or slightly down while sentiment continues to weaken.  That could set up a positive environment for the market to start another leg up.

To be continued next week...

Disclaimer
Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results.