As pleased as I am by the start of the (Source: Dorsey Wright & Investments) year, I am also highly aware that markets do not move straight up or down over the course of days, weeks, or months. I believe there will most likely be corrections during the course of this year, and how severe a correction turns out to be is ultimately determined by factors that we are completely incapable of knowing ahead of time.
The New York Stock Exchange Bullish Percent (NYSEBP) closed Friday at 74.06 marking the fourth consecutive weekly gain. It is also an indicator of the elevated risk currently in the markets. Any reading over 70 suggests that markets may be poised for some kind of pullback, but not necessarily tomorrow. On average, the NYSEBP remains above 70 for 96 days. It also reminds us of the recent strength in the market, and US Stocks continues to be the most favored of the five major asset categories I follow. The International Stocks category just passed Bonds to assume the number two position pushing Bonds to third. Foreign Currencies remain in fourth position and the Commodities category remains firmly in last place.
My Dorsey Wright & Associates analysis suggest that middle capitalization stocks are favored, as is growth over value, and equal-weighted indexes over capitalization-weighted indexes. Equal-weighted indexes are those where each stock in the index is weighted the same, while in capitalization-weighted indexes the larger stocks have the largest weighting consistent with their size relative to the other stocks. On a relative strength basis, the top three major economic sectors are unchanged: Consumer Discretionary, Health Care, and Financials. Industrials is in fourth position followed by Real Estate. With the struggles of Apple, Information Technology has moved from sixth to ninth place. Energy and Utilities are in the bottom two sectors. US Treasuries and International Bonds are favored in the Bond category, while US and Developed Markets are favored within the International stock category. Energy and Precious Metals are the favored sectors within the Commodity category.
The coming week has relatively few major economic reports due to be released, however, the following week will see the all-important January Retail Sales announcement on February 13th and January Industrial Production due out on the 15th. Consensus numbers have yet to be released for either of these reports, however, they will be important as an early barometer on how the first quarter GDP number may be headed.
As always, it is imperative to be vigilant and not to let the recent market strength lull you into a false sense of expectation that the markets will continue to rise at these most recent rates.
My next Market Update and Commentary will be published in two weeks.