The Dow Jones Industrial Average closed the first quarter up 8.1%, and according to its Wall Street Journal steward, recorded its largest first quarter gain since 1998 – that was during the heat of the tech-boom era by the way. Call me crazy but this environment feels nothing like that one.
The 15-51 strength Indicator grew an impressive 33.5% during this same first quarter period, more than 4 times better than the Average. And just like the Dow, it is over-valued at the present time and ripe for a correction. Bob Doll, chief equity strategist for notorious mutual fund giant BlackRock Inc. assessed the quarter in today’s Wall Street Journal like this:
"This year has been all about people coming away from the abyss that the world might end, and putting risk back on. We’re headed back to normalcy. The world is breathing a sigh of relief that it didn’t all end."
Really, Bob. Do you also have a bridge you’re looking to sell?
Mr. Doll’s comments are classic Wall Street propaganda and totally bogus. It’s nothing short of a sales pitch to lure skeptical investors off the sidelines and into the abyss. Professional fund managers like him are always reaching into investors’ pockets with this type of rhetoric, using inflated quarters like Q1 2012 to entice investors to ‘not miss the next big jump in price.’
Don’t buy into the hype.
Considering the 15-51 Indicator’s recent march towards the heavens the next jump could be off a very steep cliff. See the chart below.
Even though the 15-51 Indicator (15-51i) is a superior portfolio that consistently produces above-average performance doesn’t mean it can’t be over-valued and won’t dramatically correct when "the market" realizes irrationally exuberant stock valuations are at hand. Like all inflated investments, the 15-51i should correct and it will correct at the time of reckoning.
When is that time exactly there is no way to know. Nor is this information required to invest successfully. The key is to understand the environment you are investing, its relative value, and to allocate your portfolio appropriately.
The facts remain that Market fundamentals remain extremely negative and hostile. Commodity prices are spiking all across the board: gold rose 6.7% in the quarter, silver gained 16%, copper advanced 11%, and just today news of short supplies in corn, soybeans, and wheat crossed the wire triggering price increases of 3% to 5%. Add to this $110 per barrel of oil and what you have is a market ripe for inflation. That is, of course, what the investment markets are indicating with their upward moves.
As stated many times in previous blogs, rising inflation will cause interest rates to move higher and we know what happened during the subprime mortgage debacle when fragile borrowers collapsed under rising interest rates, food and energy prices. This will cause another round of Euro-Zone crisis and continuation of a debt shell game that could end with the capitulation of Greece, Spain, Italy, Portugal, or Ireland – or the Euro in general. Who knows.
The point to takeaway here is that right now the investment markets are demonstrating broad-based investment inflation that is built not on economic growth and vitality but on the back of a fragile world economy that is over-leveraged, shrinking, and under threat of another Mid East war.
So when the stock market realizes strong results in Q1 2012 you can expect strong volatility later in the year. If you expect it now it won’t be so scary when it actually happens – and if you prepare your portfolio now it won’t sting as much either.
Stay tuned and let me know if you need any assistance.