Ed Note:An Excerpt from Bert Dohmen’s Wellington Letter
“Since mid-October, the stock market rally has been on thin ice. But it has gone longer than technical analysis implied. In October there was an important change in the character of the up move: suddenly the short-term pullbacks were marked by rising volume, and the rises had declining volume instead of vice-versa.
That means “distribution.” In other words, stocks were going from the smart money to the unsophisticated money, such as mutual fund manager. Eventually, that leads to a meaningful downward adjustment.
The general perception is that the stock market has been soaring over the past four months. Well, the S&P 500 rose only 5.4% in that time.
Mutual fund cash is now near the lowest level in about 50 years. As you know, mutual fund managers are very poor market timers. In fact, they will tell you “no one can time the markets.” They rely on lagging metrics which can never catch important turns. For example, at important stock market tops, everything looks most bullish, earnings are soaring, and all these money managers are fully invested just at the wrong time.”
“Experienced technical analysts, and there are not that many, would see the important technical warning signals and be able to see the declining buying power. That allows them to get ready for an important trend change. Technical signals are often early because they are sensitive. Volume leads, prices react slower.”
What To Do
“We would eliminate any exposure to the long side. The market will face some strong headwinds in the near future.”
Bert Dohmen’s Wellington Letter
Dohmen Capital Research Institute, Inc.
P.O. Box 49-2433, Los Angeles, California