A Market Breather Coming?

If there is one thing you can count on, it is Wall Street’s tendency to pile onto the current investing fad as if it was the most self-evident truth under the sun. The analogy of sheep is often used when describing investors, and while the comparison is mostly unfair, there is definitely something to it. Anyone looks like they’re swimming if they’re going with the current, and as the old saying goes, never confuse brains with a bull market.

A veritable parade of institutional money managers are taking to the airwaves these days to extol the virtues of stocks, the rally, the economy, etc. All, of course, are fairly safe bets now that we’re near record levels, but a year ago when they were cheap, you could not turn on CNBC or read The Wall Street Journal without being bombarded with dire forecast after dire forecast. We knew it would happen, but the continued ability of the conventional wisdom to be flat-out wrong never ceases to amaze us.

The bottom line is that...most S&P 500 sectors suggest the market will need to take a breather shortly. Notably, the market’s rally in the past several weeks has largely been confined to large-cap stocks, so we would not be surprised to see some rotation into small- and mid-capitalization names as part of such a correction. Given the size of the rally relative to the tangible improvements in the economic picture, however, we think much has already been discounted; a period of relative flat trading, especially into the summer, is equally as likely as some sort of sharp break downwards.

Importantly, the bandwagon-jumping that is currently raging on Wall Street is a mild positive from the standpoint of sentiment. Whereas the last several years has seen an pervasive unwillingness to see the world optimistically, the general sense now is that we’re over the worst of it and are finally back on track. This is good, as it helps weather bad news or the occasional step backward in economic data. The tenacity of the rally through the sequester nonsense illustrates what we mean – two years ago, that mess would have easily been worth 1,000 Dow points.

We believe corrections are a healthy part of stable, long-term trends. As such, we tend not to fear them very much. As investors, not traders, we tend to focus on things that may or may not change the fundamental outlook, and try not focus too much on short-term market gyrations.

Source:  Scott Chan, Leeb's Market Forecast

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

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