Conservative Approach Currently Wise

April 04, 2011

No asset is cheap, but cash is trash (most of the time).


The strength and resilience of this bull market continues to impress. In the first quarter, the S&P 500 gained 5.9% despite (1) multiple revolutions in the Middle East and North Africa, (2) an earthquake, tsunami, and nuclear disaster in the world’s third-largest economy, and (3) further price spikes in essential commodities—gasoline was up 21% in the quarter; cotton rose 39%; and corn and cattle both rose 10%. Stock markets did succumb to a long-awaited correction in early March, but it lasted just two weeks. Stocks snapped back in the second half of the month, and the S&P 500 is again flirting with new bull market highs (Exhibit 1).


Exhibit 1: A Textbook "V-Shaped" Correction In March



Market technicals have been solid on the recent rally. Breadth has been excellent; the NYSE advance/decline line and small-cap indexes both registered new bull market highs last week. At present, the path of least resistance appears to be to the upside. I would expect some congestion to relieve short-term overbought conditions, but stocks appear poised to work their way higher in the second quarter. How much higher remains to be seen.

Emerging markets stocks, which had been lagging in 2011, have soared in the past two weeks, sending the emerging markets ETFs to new bull market highs (Exhibit 2) and signaling that investor appetite for risk and confidence in EM growth is intact.


Exhibit 2: EM Stocks Up 9% In Two Weeks!



It should be noted that over one-third of the recent spurt higher in the broad emerging markets stock ETFs can be explained by a jump in the value of EM currencies (Exhibit 3). The WisdomTree Dreyfus Emerging Currency Fund (NYSEArca: CEW) is an attractive vehicle for gaining exposure to a diversified basket of EM currencies.


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