Cautious Stock Market Strategy

Stock markets took us on a roller-coaster ride last week, with sharp drops on Monday and Tuesday, equally sharp rallies on Wednesday and Thursday, and then a pullback on Friday.

So far, January is shaping up to be the mixed bag that historical tendencies have suggested. Meaning, even though the November through April timeframe is the year’s most bullish season, positive gains in January are no sure bet.

This year, a number of question marks seem to have investors leaning back on their heels. These include: plummeting oil prices, geopolitical turmoil (including the most recent terror attacks in France) and continued divergence between the world’s major economies — U.S., Japan, the euro zone and emerging-markets, namely China.

And, of course, all eyes are on the world’s central banks, which, I suspect, will be taking divergent policy courses beginning this year. The ECB is expected to deliver a stimulus package later this month… and, depending on the size of the plan, it could spur new trends in short order.

Let’s take a closer look at these trends as we go around the market in 10 seconds…

• Global stock markets mostly ended the week higher, with the strongest performance seen in Chinese (FXI) and emerging-market (EEM) stocks. European shares were essentially flat, as investors wait for definitive word from the ECB regarding its widely-anticipated stimulus plan.

• Bond markets rose across the board as interest rates dropped sharply lower, with the 10-year Treasury rate falling below 2% to match its October 2014 low. The downtrend in rates is a continued symptom of deflationary pressures that we’ve talked about for years. Plummeting energy prices are adding fuel to the fire.

• Commodity markets were split. Oil and natural gas continued to slide lower, while gold and silver edged higher. The U.S. dollar continued its bullish climb last week, putting downward pressure on the commodity sector as a whole. Expect this trend to last awhile longer.

Investors are decidedly cautious as this new year begins. It seems everyone is a bit hesitant to commit to new, bullish positions until some questions are resolved.

The bullish breakout in small-cap stocks is now being tested, but a renewed push by the bulls could put the lagging index back above 1,200 — that’s the level I’d like to see broken to the upside before calling the bullish trend in equities alive and well.

For now, we’re well-balanced and should wait for a clearer trend to emerge. Stay tuned.







Adam O’Dell

Using his perfect blend of technical and fundamental analysis, Adam uncovers investment opportunities that return the maximum profit with minimum risk.