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Financial Industry Insights from Advisors Asset Management
On February 23, 2015
AAM Viewpoints - Market Turning up the Treble
High volatility in a confined trading range can present a formidable challenge for stock investors. Such behavior might suggest that the market is in the throes of a distributional pattern that finds broad institutional selling amid retail buying that may prove to be a precursor of a substantial decline, as it has sometimes proven in the past. The implication is that considerable buying potential is expended – and may be depleted - keeping the market lodged within a range when the forces of conventional wisdom favor a surrender to the daily onslaught of troubling, risk-centric headlines.
While the volatility has, at times, been unsettling I do not think that the expansive trading swings year to date are a harbinger of a dangerous equity environment. In fact, the market has held steadfast to important technical levels. On February 2, the DJIA briefly broke below its short-term trading band touching its 200-day moving average at 17,000 before dashing above 18,000 for the first time this year. This swing shattered a near-term technical ceiling and may have installed integral support at levels that were regarded as stubborn resistance in January. The underlying market presents an even more constructive condition where sector leadership remains broad and diverse; net money flow trends continue to present generally impressive accumulation among large, medium and small-cap stocks; and buyers have increasingly acted on shallow intraday retreats.
The year-to-date seesaw price excursions seem to be a normal consolidation following the market’s colossal recovery immediately after October 15. If my calculations are correct the market may be completing a ‘handle’ base that could launch an advance above DJIA 20,000 by year end. And, while there is top-down and bottom-up evidence that investors are accepting more risk for more reward as the move toward growth builds, speculation has been held in check by the market’s self-policing back and fill exercises.
It may be difficult for even ardent bears to refute the market’s resolute elasticity amid headline risk over the past several months. The resolution of some nagging concerns such as West Texas Intermediate crude oil’s (WTI) six-month freefall (I believe oil has decisively bottomed) could go a long way in attracting renewed, and more aggressive, buying. Contrary to being on the precipice of a major fall, I am more inclined to see year-to-date movements as the underpinnings for a substantial launch deep into record territory.
One of the most notable trends year to date is the commanding lead of growth versus value. The Russell 3000 Growth total return index is ahead of the Russell 3000 Value total return index by 372 bps as of February 19. While this is additional confirmation of a market in transition, it is not a call to abandon value. I believe it is, however, an actionable illustration of the importance of including growth in equity portfolios as the cycle moves into its advanced stages. Turn up the treble.
CRN: 2015-0223-4620R
This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information atwww.aamlive.com/blog/about/disclosures. For additional commentary or financial resources, please visitwww.aamlive.com
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