While scared money dithers, stocks remain red-hot. The Tokyo and Shanghai markets could take off as investors seek out laggards, writes John Bollinger in the Capital Growth Letter.
I remain constructive on the stock market, which continues to rise. The latest turn up evinced renewed interest in the middle-sized and smaller stocks with a renewed interest in growth; factors that are important to health of the overall market.
I have raised a bit of cash as a tactical maneuver so we can take advantage of the steady group/sector rotation that marks this rally. In my view, internal rotation where individual groups correct in an otherwise strong market, is one of the healthiest and most sustainable phases of the market. In essence, the rally is correcting itself as it goes along.
Not many understand this concept, but those that do are able to stay in a rally when others fear that it is ripe for a correction.
Skeptics Crowd Sidelines
The money on the sidelines can be assessed by listening to a gentleman I met at a party the other night. He was retired, in cash and knew all the reasons for worry: the debt, the Euro crisis, unemployment, bankrupt states, no US manufacturing, jobs going overseas, foreign competition, bad schools, high taxes, and so on ad infinitum. When asked if he might be wrong, or if there was any possibility of positive outcome, he was firmly dismissive.
My guess is that the real trouble is that he is not an outlier, but rather close to the mainstream. He is in fact a mixed blessing for stocks, as he represents an amount of capital what will eventually be drawn back into the market seeking returns, while at the same time he is a a drag on the economy with his hunkered-down mentality.
Those wondering about the sustainability of the rally in a longer-term sense are also likely wondering if there aren't some sectors that haven't participated fully and are likely to play catch-up. While most US sectors have participated rather fully, there may still be some interesting opportunities in the international arena.
Go East, Young Man
For example, Japan’s Nikkei 225 index has retraced only about a third of its decline, while US stock indices have typically retraced two-thirds or more of their declines. Another example is Shanghai, where stocks have retraced only a quarter of their declines.
Our view is that as we go forward rotation will pick up these lagging markets, presenting opportunities to investors as it does. So as we run out of steam here, rotating some money abroad might be a good idea.
With that in mind we are trimming our US stock allocation by 5% and raising our international allocation to 15%. No need to hurry on this change.
