As many of you know, I rely heavily on a vast array of fundamental financial data and economic statistics to determine the risk/reward relationship of investing in the financial markets at any point in time.
However, unlike most fundamental analysts, I also regularly monitor numerous technical indicators and keep a close eye on which market sectors (and industries within those sectors) are improving in terms of their relative price performance.
By using a combination of fundamental, technical, and sector rotation models, I'm usually able to determine with a high degree of confidence where stocks and other asset classes (bonds, commodities, and precious metals) are likely headed over both the near term and several months into the future.
During the past six months, more and more of the approximately 100 fundamental indicators that I regularly analyze had been suggesting stock prices would fall sharply sometime between June and September of this year. Then, in early July the technical (and investor sentiment) indicators that I monitor gave a "sell" signal for the first time since January 1999. Well, as you know, stocks fell precipitously during the period from mid-July to mid-August.
From the beginning of August through last Friday, my sector rotation model revealed that defensive sectors of the market, such as the Consumer Staples, Healthcare, and Telecommunications sectors, had been significantly outperforming all of the other 10 major economic sectors (in terms of their relative price performance), as investment portfolio managers rotated their holdings to these sectors.
Although the Telecommunications sector continued to rank in the top-three performing sectors this week, stocks in the beaten-down Basic Materials sector also rose sharply (in terms of their relative performance), thus catapulting the Materials sector to the top-performing rank over the past five days. With oil prices rising to all-time highs this week, the Energy sector was the second-best performing sector over the past five days.
Those of you who have subscribed to our new ETF service realize that the Basic Materials sector and Energy sectors tend to be among the best-performing sectors during the "peak" phase of the business cycle and that the Telecommunications sector tends to perform well during the early contraction phase and when stock prices in general tend to trend lower. Hence, my fundamental and sector rotation models clearly indicate that stock prices in general have probably seen their better days and that you should be taking steps now to protect your portfolio against the possible emergence of a new bear market.
Meanwhile, most of the technical and investor sentiment indicators that I employ suggest that stocks will pull back next week, after running into overhead price resistance today.
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