For the short trading week that ended Thursday, the Dow was up 82, or 0.7%, at 11573, the S&P 500 rallied for a fourth straight week and rose 13, or 1%, to 1257, and the Nasdaq added 23, or 0.9%, to 2666. For many of these indices these levels have completely recouped all losses going back to pre-Lehman failure, which was September 2008.
Domestic high yield corporate bond funds also gained for the week. Generally, except where not available, we still maintain over-weighted exposure to high yield corporate bond funds. They still have annual yields above 7%, display above average long-term spreads above comparable maturity US Treasuries, with that spread clocking in at approximately 5.70%. Long-term averages for this spread are approximately 5.25%, so there is still some cushion there. Furthermore, current and expected 2011 high yield bond default rates are expected to actually be below long-term average default rates, so that spread becomes even more attractive.
Investor Sentiment is sounding a possible short-term top. Percent Bullishness amongst investors is high, the VIX Ratio is quite low and Cash Levels in equity mutual funds remains at an all-time low. The theory goes as follows; as investors get more invested, they more and more voice their opinions of bullishness. But, as they get more and more invested, they run out of buying firepower to continue to drive the market higher. Therefore the market momentum slows and perhaps leads to reactionary selling the moment a downturn appears. Many investors believe that perhaps we are nearing one of those pullbacks. There could be some selling pressure on equities.
Last week oil approached its 12-month high, closing at $91.41 per bbl, while gold continued its consolidation trade, closing at $1,379 per ounce. We took off half of our gold positions and sold all of our silver positions. We could be wrong but believe that there are other better opportunities for 2011.
We are bullish on 2011 as the 3rd year of the Presidential cycle is usually the best for the market. We expect a brief pullback after the first of the year and then a somewhat volatile but generally very good 2011.
Contact Richard Taylor for additional information.