Joining the Crowd

As more bullish equity enthusiasts join the uptrend, equities are increasingly vulnerable to a shock that, by all indicators, will be addressed with "buying on the dip."  The buying pressure in equities continues to track with the persistent growth in bullishness among investment advisors. Our trend-following indicators flash green throughout. Some noteworthy trends:

Small caps and growth continue to outpace large caps and value. After hitting trendline support in early January, the ratio of small vs. large cap continues to shine, following a steady uptrend since the bottom in March 2009. We are watchful for a peak in this outperformance leading any peak in the S&P500. The small cap/large cap ratio last peaked about 18 months before the peak in SPX:

US equities maintain their relative strength lead vs. emerging markets, a lead which formed in November 2010.  Bubble talk of China real estate, geopolitical risk and rising inflation and monetary tightening in emerging markets have encouraged outflows into developed market equities.  This might present an opportunity for selective investment in certain emerging markets vs. others. Technically, Malasia (ETF symbol EWM),  Indonesia (ETF symbol IDX) and South Africa (ETF symbol EZA) have seen some impressive bounces. This contrasts with MES (The Gulf States ETF) as one can expect has lagged emerging markets due to continued political unrest:

As for other positive signs for equities, Dow Theory remains consistently bullish as the Transports reached a new recovery high, following the lead of the Dow Industrials.  Strong relative strength growth in Corporate Bonds vs. Treasuries, a measure of risk appetite and preference for stocks, also continues. We added a relative strength ratio of LQD (the iShares iBoxx Investment Grade Corporate bond ETF) vs. S&P500 at the bottom of the chart (below). Note the price crossing its 34-day moving average indicating turns in preference of equities vs. bonds. This signal has been on an intermediate-term  "buy" on equities since September:

We continue to see lagging performance in the Nasdaq vs. the S&P500. This likely represents concentration in money flows into a broader mix of sectors (industrials, materials, financials) versus the tech-heavy index. We are a bit cautious toward putting too much credence in this relationship, however, as QQQQ, which is the ETF that holds the Nasdaq 100 stocks, is weighted 19.74% in Apple Computer and is therefore heavily influenced by this particular stock.  APPL has been lagging the SPX since mid-October 2010.

Our trend-following strategy keeps us positive on equities. We are very comforatble with partial hedges on these longs, however, with index puts on SPX and trailing stops to protect profits.

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