Sam Stovall, the Chief Investment Strategist for Standard & Poors appeared on CNBC this morning, and the tip of the day was a shift or change in S&P's Sector Rotation Model. Now this is important stuff, so pay attention.
In the March and May issues of the Investor Alert newsletter, I explained in detail about being in the right sectors at the right time. This morning, Stoval revealed S&P's changes to their Sector Rotation Model, and I wanted to pass the information along with a few precautions.
Here are the recent changes:
RECENT CHANGES:
07/13/05: S&P UPGRADES ITS CONSUMER DISCRETIONARY SECTOR TO OVERWEIGHT FROM UNDERWEIGHT.
07/13/05: S&P UPGRADES ITS INFORMATION TECHNOLOGY SECTOR TO OVERWEIGHT FROM UNDERWEIGHT
07/13/05: S&P UPGRADES ITS FINANCIALS SECTOR TO MARKETWEIGHT FROM UNDERWEIGHT
07/13/05: S&P DOWNGRADES ITS CONSUMER STAPLES SECTOR TO UNDERWEIGHT FROM OVERWEIGHT
07/13/05: S&P DOWNGRADES ITS HEALTH CARE SECTOR TO MARKETWEIGHT FROM OVERWEIGHT
07/13/05: S&P DOWNGRADES ITS UTILITIES SECTOR TO MARKETWEIGHT FROM OVERWEIGHT
06/30/05: S&P DOWNGRADES ITS INDUSTRIALS SECTOR TO UNDERWEIGHT FROM MARKETWEIGHT
05/19/05: S&P UPGRADES ITS CONSUMER STAPLES SECTOR OUTLOOK TO OVERWEIGHT FROM MARKETWEIGHT
05/19/05: S&P DOWNGRADES ITS MATERIALS SECTOR OUTLOOK TO UNDERWEIGHT FROM MARKETWEIGHT
05/19/05: S&P DOWNGRADES ITS ENERGY SECTOR OUTLOOK TO MARKETWEIGHT FROM OVERWEIGHT.
S&P recommended an overweight position only in consumer discretionary and information technology stocks. They went on to say that investors should underweight in consumer staples, industrials, and materials, and have equal weightings in energy, financials, health care, telecommunications services, and utilities.
Ok, fine. Now for the disclaimers:
1) S&P's current Asset Allocation Models only calls for a only a 45% weighting in US Stocks, 15% in Foreign Stocks for a total portfolio weighting of 60%. 25% is in Bonds and 15% is in Cash. Hmmm ! Is a word of caution in the wind ?
2)S&P went on to say that "the S&P 500 earnings yield and the 10-year note yield is now 60 basis points above the 40-year average, implying that stocks appear more attractive than bonds." But also cautioned that "a similar relative attractiveness would have made an investor favor stocks at the end of 1973, just in time to participate in 1974's 30% decline." Whoa ! Not so fast.
3) What about the timing of the recent purchases? Are you expecting a correction first? What are the buy limits ?
4) What is the timeframe? From now until the end of the year, or for the next few years?
Here's My Take:
1) Equity positions should be no more than 60% for the most aggressive investors. More conservative investors should adjust their allocations downward accordingly.
2) A near term correction could bring the market averages down 5-10% from current levels. Investors and traders can use the correction to increase their equity weightings in anticipation of a rally through December. Use stop losses or a mental stop of 10% to preserve capital.
3) 2006 could mark the continuation of the secular bear market that began in 2000.
Note: I'll be out for the rest of the week starting Tuesday, July 18th. I'll update the Journal if an important event occurs.
