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Markets Keep Rollin’ Along

Putting Cash To Work

Last week I wrote to you that we had broken through overhead resistance and that we would be investing when the over-bought readings on the indicators cleared.

On the chart above, you’ll see two small red boxes – the upper one on the Relative Strength Index graph shows you that it dipped below overbought a couple days ago. The other one on the price graph shows you where we put that money to work.

We are now close to fully invested in client accounts after booking some healthy profits from some of the trailing stop losses that had hit.

Instead of chasing the shares of things we own that are up significantly, we added to shares of companies that are trailing the broader market or that have losses year-to-date.

For the companies that we were stopped out of – some are down farther but some have gone higher. Its just one of the risks of using stop losses to protect gains – sometimes stocks pull back temporarily and then go higher, sometimes they just keep falling. Our plan is to buy back the companies we sold on any pull back in the market subject to their then-current fundamental outlook.

As far as the current rally goes, the good news keeps coming on the economic front – today it was a surprisingly positive unemployment report.

The mind-set in this rally is one where good news is bought and bad news is largely ignored or used as a buy-the-dips opportunity – that is a sign of a strong trend.

I was watching CNBC last night and one of the commentators was discussing how the ownership of common stocks overall is at one of the lowest levels in several years. Their theory is that we are seeing individual investors, pension funds, hedge funds, mutual funds – you name it – making a shift out of bonds and cash into equity securities and that this cashflow into the market will continue to push the market higher.

This makes perfect sense. So, I checked out some data and their theory on low levels of ownership seems valid – there has been a massive flow of money out of equity securities into fixed income securities since the market turmoil of 2008.

A lot of investors sold during the crash and never bought back in, having lost faith in the market after a second crash in a five year period. Those folks missed the huge recovery we’ve seen off the lows and are wanting to recoup some of their lost wealth in a good stock market.

Many individuals and institutions are underweight stocks compared to their target asset allocation – plus many have started to target high-dividend-yield common stocks as income investments instead of bonds.

There are many solid blue chip companies paying dividends with yields that are greater than bond and CD yields – some people are being tempted to move money into equities for the first time in a long time.

Our own Dividend Income Portfolio that numerous clients are invested in has a current yield of 6.46%. Its very popular with retired people who take use the cash flow to supplement their other sources of income, for endowments that like to use it to cover their distribution obligations, and others who just feel more comfortable in an income strategy than a growth strategy.

For now, we are comfortable with our 1370 target for the S&P 500 but will be evaluating it as we move toward it. That level is the market high from 2011, so given the current investor sentiment, it wouldn’t surprise me to see it.

However, there are some exogenous events out there that scare me that don’t have any direct correlation on current corporate earnings growth but that could derail things (I received a breaking news text last night from the Washington Post speculating on the Defense Secretary’s statement that he wouldn’t be surprised to see Israel attack Iran this Spring).

As a consequence of that, we are still using our trailing stops to protect outsized gains in companies. As stated earlier, its not a perfect strategy, but no one ever went broke booking a 12% when the market is up 4%.

Enjoy the weekend and I am soon off to attend the NAACP Freedom Fund banquet at the I-Hotel.

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