Markets hold gains, but investors remain cautious

To quote Yogi Berra, “it ain’t over til’ it’s over!” All the talk about the market being too high and due for a correction is all good and well, but the market is going to do what the market wants to do, regardless of your or my opinion. The trend remains to the upside and the negative focus is Europe, Washington DC, the economy, etc. etc. etc. When the trend shifts, and you will know when it shift, then you can head for the exits. Until then, keep your stops in place and let your profits run.

Eco Buzz:

The ADP jobs report on Wednesday showed growth in the private sector adding 198,000 jobs. However, the news for the most part was ignored. The report has not been tops on the list of providing data that is market moving. Thus, all eyes are focused on the government report due out Friday.

Factory orders were down 2% for January which was better than the consensus. The challenge… January data. I would expect the February data will be better as the sector has been picking up of late. Again not a market moving piece of data based on the age of the report.

Behavioral Trading:

The markets made a solid move off the lows posted on February 25th, why? What was the driver or the catalyst for the move? First you have to understand what drove it lower to make any sense of why it recovered. The FOMC minutes was the issue… The Fed Presidents had collectively discussed the issue of quantitative easing not working to jump start the economy again. Thus, the assumption, an end was coming to the money dump from the Fed. That produced a spike in the volatility index, etc. etc. etc. On the opposite side of those comments was the damage control. Bernanke and the twelve dwarfs (alias, Fed Presidents) were out in mass saying that the statements were miss understood, etc. etc. etc. In the end investors started to believe, or at least accept, nothing would happen until the next FOMC meeting in March. That brought the buyers back to the table. Then the economic data on cue was better than expected for the February data and the buyers got bolder and thus, the bounce back to the February highs and in some cases higher. The behavior of the market is driven short term on emotions of confidence and belief. When those core emotions are shaken the selling won’t be far behind. Understanding the behavioral aspects of the market is as important to understanding the logic of the markets short term.

Following the Trend:

The Dow Jones Industrial Average hit a new high on Tuesday, but the S&P 500 index is still roughly 30 points away. In reviewing all of the moves last night it was interesting to note that the trend in large cap value/dividend stocks have outperformed small and mid cap stocks. This is not surprising taking into account all the increased dividend and share buy-back plans announced. Companies understand that a 1.5% GDP isn’t going to allow them to expand and grow through the typical sell more, increase revenue and hire more people format. They are more willing to take the free-cash-flow and buy back stock to generate a return on equity. The challenge is it does nothing to grow the economy, but it does increase personal wealth of those holding the stock. The trend remains to buy your own stock as an investment of capital. As long as this trend remains in play look for the large cap dividend stocks to remain in the leadership role of this uptrend.

Investor Sentiment:

Reports (investor’s intelligence) are showing a decrease in the positive (bullish) sentiment. Two weeks ago the 48.4% positive/bullish reading fell to 46.3% and now it is at 44.2%. This is the third consecutive decline in the reading. What does this mean for investors? Caution short term is advised. The need for investors to adjust their short term risk parameters is growing. As we stated in our update yesterday the Dow hit a new high and there were more negative headlines than positive. The put/call ration was above 1 until a solid drop to .71 on Wednesday. This data is not telling a pullback or correction is here, it is simply another indicator that spells caution about the current market environment.

Bond News:

The Financial Times reported that iShares High Yield Corporate Bond ETF (HYG) has 8% of the outstanding shares borrowed short. As you can guess that is the highest level since October 2007. SPDR High Yield Bond ETF (JNK) had 9% of the outstanding shares lent on short trades. Both funds are also netĀ redemption’sĀ of approximately $1 billion for the year according to Index Universe. With the dividend yield now at 5.6% and the limited upside for growth in the underlying bonds, the risk/reward relationship is not attractive. If you own these bonds or ETFs you may want to evaluate the downside risk and make the necessary adjustments.

The futures are steady as we look to the start of the trading day. Europe is on the watch list with the ECB and BOE meeting on policy decision today. Jobless claims are out today with the government report due on Friday. Nothing big in the way of data, that leaves traders to invest on their own sentiment and for now that is mixed based on the market data. Stops in place, strategy decided and forward we go.