Thursday, January 12, 2012

Raise Some Cash

In recent weeks, I've been neutral on stocks.   That is, one should have had a "normal" portfolio allocation to equities that is consistent with one's long-term strategic equity allocation.

With stock prices now at their highest level in several months, the mood among investors has also climbed. My key measures of investor sentiment now reflect more optimism than is favorable for future gains in stock prices.  The market's technical condition indicates that prices have become somewhat elevated as well, warranting caution about significant new purchases at current levels.  I also think that earnings expectations are still too optimistic for 2012.

Though expectations for European economic growth, its currency, and corporate profits are depressed, headline risk is still considerable.  European governments will need to issue $1 trillion in new bonds this year (to replace maturing debt and cover deficit spending), with almost 1/3 of that to be issued by Italy.  Valuations among European equities are quite depressed relative to historical norms, but I am willing to miss opportunities there.  Now if share prices fall even further.....

I am loath to forecast much of anything, but I think it is unlikely that U.S. stock prices will reach new highs (above 1350 on the S & P 500) anytime soon.  I'd raise cash levels by trimming stock allocations here.

Steve Lehman

S & P 500:  1295

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