Extreme Caution — ETF Update

Caution, perhaps extreme caution, is in order regarding the stock market. This caution continues to be reflected in the Dynamic Momentum System which ranks ETFs. The top-ranked ETFs continue to be safety-oriented. BIL, a cash equivalent, ranks highest.

This note shall be short. I have been traveling and had my laptop pass away. The DMS system(s) continue to rank BIL (cash) as the highest ranked position. UNG (natural gas ranks second). The SSS switch continues to recommend cash. That recommendation has not changed in about 7 or 8 weeks. In retrospect, it has been correct.

All of the trading systems signal caution. If you have been following these momentum rankings, you are already out of the market (at least for whatever portion devoted to DMS — SSS trading).

From a fundamental standpoint, there has been little reason to participate in equity markets for the last year or more. That divergence between valuations and fundamentals may last a bit longer but is expected to come back into equilibrium. If it does, it will be via a dramatic drop in valuations. They can change almost overnight. Fundamentals move more like ocean-liners. That is they are slow to change. Given the penalties that plague the economy, there is little reason to be optimistic about fundamentals improving, even slowly. Given the realization that the Fed has no magic and that low (negative?) interest rates are actually harming the economy and prudent citizens, the likelihood of rate increases is probably not far away. These will precipitate a change (down) in valuations.

Unless and until some unconventional ETF (say gold or some other defensive play) rides to the top in momentum, I remain very guarded regarding investments. Personally, I think we could be heading for a major revaluation of assets. Recall, that we have had two such periods this new century. Both times stock prices dropped 50% or more from their highs. Arguably our economy is in worse shape today than then. Arguably valuations are more out of line than then.

BE VERY CAUTIOUS. Perhaps EXTREME CAUTION is in order.