Stock markets have taken the up-escalator so far this year with not much to be seen in the way of downside retracements. There are reasons supporting and contradicting the validity of these moves (and whether they should even be occurring at all) so there are real questions that investors should be asking before opening heavy positions in the equities space.
Sector Differences
The reality is that markets are likely in store for valuation pullbacks at current levels, and these could be deep enough that they catch a substantial portion of the market by surprise.
If this does occur, it is important to remember that market declines happen much more quickly than market gains, and this could be enough to erode gains for many bullish investors who are long at the wrong levels. Increases in market volatility could also create issues, and investors should read this review of Motif Investing to learn more about ways of accessing the market.
On the positive side of the argument, we can see that the Dow Jones Industrials are likely to outperform most counterparts on a percentage basis for the remainder of this year. There is not much to be seen in the way of obstacles in fundamental terms given the fact that the Trump infrastructure planning programs should support many of the companies that are included in the Dow.
This ultimately means that instruments like SPDR Dow Jones Industrial Average should not have much of a problem outperforming the SPDR S&P 500 ETF (SPY, Financial) and the PowerShares NASDAQ Trust (QQQ, Financial). The overall trajectory of the stock space has been positive, and this has been a tide that has lifted all ships, but it is important to remember the fundamental makeup of each of these stock benchmarks in order to identify which assets are most likely to outperform over the next six months.
Price levels
In SPDR Dow Jones Industrial Average terms, markets are trading relatively close to support that could trip stop losses if valuations decline much further.
Psychological levels at 200 could push prices 10 ticks lower if tripped so traders who are viewing things on a shorter-term time horizon could be seeing added volatility if not positioned properly. Any drops like this would be bought quickly near the 190 handle so this means that rising price volatility is likely to be seen later this month.
Disclosure: The author has no position in any asset mentioned.
Start a free seven-day trial of Premium Membership to GuruFocus.
