Indicators Have Shifted – New Investment Directions in the Wind

Thursday, February 18, 2010

Seems like everywhere you look, another improved economic indicator is announced: economic growth, employment and housing are good examples. In addition, the Federal Reserve looks close to raising short-term rates. On top of that, there have been recent, sharp moves in two important contrarian indicators.

Add all these facts together and it looks like something’s afoot. It’s time to be sure your portfolio is positioned for the outcome, which could be significant.

I have been focusing my recent write-ups on the expectation that three areas would see new trends develop:

  1. The Federal Reserve would begin raising short-term interest rates, making time deposit and money market fund yields become desirable once again
  2. The Fed’s change in approach amid further signs of economic improvement (and inflation forecasts increasing) would cause longer-term bond yields to rise and prices to fall
  3. The economic gains would be accompanied by better than expected company earnings, causing the US stock market to start an extended bull market

No need for me to reiterate the numerous improving economic and financial measures. The tide is definitely rising, requiring naysayers to shift their focus further afield in search of bad news – like Greece.

The Federal Reserve Open Market Committee’s (FOMC’s) minutes, just released, show an expanding willingness to change direction. Even Chairman Ben Bernanke has been talking about allowing rates to begin rising – not Federal Funds, but short-term rates, nonetheless.

At the same time, two important contrarian indicators have turned down (meaning we should be thinking up). As the stock market pulled back over the past three weeks,

  1. Mutual funds that invest in US stocks saw a reversal of investor flows from a positive $1.3 billion (week through January 20), to a negative $5.2 billion (week through February 10). – Source: Investment Company Institute “Weekly Flows of Long-term Funds” (
  2. Investment advisor (i.e., independent newsletter) forecasts turned bearish. Survey results as of January 19 were 52% bullish, 19% bearish and 29% neutral/undecided. As of February 10, results were 34% bullish, 26% bearish and 40% neutral/undecided. – Source: Investors Intelligence “US Advisors’ Sentiment Report” (

Such a shift is not unusual. It follows a common cycle of “darkest before the dawn” feelings, and clearly US stock investors are thinking bearish thoughts. There is an old saying that goes something like this: “If the market can’t go up, it drops to make room.” Like an athlete first squatting before jumping, the market coils itself. This action, in the face of coming good news, can seem worrisome, but it is actually beneficial. It chases out the weak holders, strengthening the shareholder base.

With all these pieces coming together, I believe that time is growing short before we see the three new trends emerge. Timing is always uncertain, but it is always better to be early than late. These two Bernard Baruch quotes say it all:

A speculator is a man who observes the future, and acts before it occurs.

I made my money selling too soon.

Still worried about not hitting the bottom or top? Try on this quote of his:

Don’t try to buy at the bottom and sell at the top. It can’t be done except by liars.

So, it looks like now is a good time to move “decide whether to sell bonds and buy stocks” to the top of the to-do list.

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John Tobey on Seeking Alpha

Seeking Alpha Certified

February 2010