Written by Dave Young, President and Founder of Paragon Wealth Management
Even though there have been six selloffs this year – the stock market keeps trending up. If this holds, 2013 will go on the record books as a very good year. How is this possible when there are so many things to be concerned about?
The stock market is a leading indicator. When the economy is weakening then usually the stock market is weak before the economic indicators become weak. Conversely, the stock market will usually strengthen before those same economic indicators get stronger.
This year, amidst a lot of doom and gloom the economy has been continuously strengthening. The CLI, which is a global indicator of future economic growth, recently rose to its highest level in two years. Also, Global PMI’s, which measure economic strength, also climbed to a two year high.
Breadth measures show that the global growth is also broad based which is very positive for the U.S. stock market. In addition, the emerging market economies have been showing strong relative strength performance.
In general, most of our models are positive. Our trend models continue to be strong. Our biggest concern is that positive sentiment is very high and at levels that force us to be cautious. Sentiment does not tell us when the rally will end but we do know that when sentiment levels get this high it is time to start being cautious. We will continue to stay invested with this upward trend as long as it lasts but are taking a more cautious approach at this point in the rally.