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Broadgate: Market News 11/3

11 March 2013

The Dow’s run to record highs in the stock market’s rally this year may not mean it’s time for investors to go on a buying spree.

Instead, many financial advisers are telling clients to go easy, whether they’re just getting back into stocks or seeking to add to equity positions.

Questions over how much higher the market can go have kept caution in play, with some technical indicators suggesting the market is overbought.

But the case for investing in stocks is strong, they said, particularly given signs of more strength in the economy, especially Friday’s jobs report, which showed a much higher-than-expected 236,000 workers added to the payrolls in February.

“We’re telling clients to take a more defensive approach to the market right now,” said Frank Fantozzi, chief executive of Planned Financial Services, an independent wealth manager in Cleveland.

Yet stocks remain a better choice than other asset classes, he said.

“If I had to pick a category, I’d still be looking at equities,” Fantozzi said. “We still think the market is going to post positive gains for the year.”

On Tuesday, the Dow Jones industrial average broke through levels not seen since 2007 and continued to mark new record highs the rest of the week. The Dow is now up 9.9 percent since Dec. 31.

The broader Standard & Poor’s 500 on Friday ended less than 1 percent away from its record close of 1,565.15, which it reached on Oct. 9, 2007. The S&P 500 is up 8.8 percent since the end of 2012.

Valuations remain relatively attractive. The S&P 500’s forward 12-month price-to-earnings ratio, a commonly used measure to value stocks, is at 13.8 percent, still below its historic average P/E of 14.8 percent, based on data going back to 1968, Thomson Reuters data showed.

CAUTION VS APPETITE

Other experts gave similar advice, saying investors should proceed, but with caution.

“We still have some speed bumps ahead of us,” said Fred Dickson, chief market strategist at D.A. Davidson & Co. in Lake Oswego, Oregon. “We don’t see any urgency to jump in.”

U.S. spending cuts loom as Washington debates the path of fiscal policy, while the euro-zone crisis is far from resolved. U.S. economic growth has also been slow.

Another reason for caution: U.S. earnings growth – one of the biggest drivers of the market – is slowing. Estimates for first-quarter S&P 500 earnings are now at 1.4 percent, down from a 4.3 percent forecast from Jan. 1, Thomson Reuters data showed.

“I try to tell people that although it’s a great run, there will probably be some pullback, and we’ll see it start to taper off into the summer,” said Rodd Newhouse, a Dallas-based financial adviser with Wells Fargo Advisors.

Investor interest in the market is high, analysts have noted.

TD Ameritrade Investor Movement Index, which is designed to measure investor sentiment based on data on positions and trading activity, rose to 5.14 in February from 4.71 in January, and is high relative to historic ranges.

Stock funds attracted $7.14 billion in the week ended March 6, data from EPFR Global showed on Friday, well above the previous week’s cash gains of $1.2 billion. Appetite for U.S. stocks largely accounted for the inflows.

“Every call that I took this week was (clients asking) ‘Why?’ They want to know why this market is trading here … they want to be involved,” said Leslie Ferrone, an Oak Brook, Illinois-based financial adviser affiliated with Concert Wealth Management.

TIME FOR A BREAK?

Some argue it may be time to take a break from buying.

Paul Mendelsohn, chief investment strategist at Windham Financial Services in Charlotte, Vermont, said his computer models show the market is “extended,” including regression slopes and other indicators that look at how far the market has come and how fast.

“The key here is just don’t make a big mistake,” Mendelsohn said.

He said he’s been reducing his exposure to stocks in recent weeks, reversing a more bullish stance.

“I’m going to err on the caution side here.”

Other advice on how to manage the current trend is to shop for bargains while selling stocks with sharp gains.

“We’re still riding the wave, but taking profits in some of the higher flyers that have done really well and buying some of the areas that are down for the year and hitting new lows,” said Alan Lancz, president of Alan B. Lancz & Associates Inc., an investment advisory firm in Toledo, Ohio.

“We’re still finding some bargains,” Lancz said.

Fantozzi said he still expects large-cap growth industries to do well, including manufacturing and technology. But he said he would avoid defense companies because of the potential for government spending cuts in that area.

“If there’s a pullback, we’re not looking at a major pullback,” Fantozzi said.

Currencies

The dollar hovered near a 3-1/2-year high against the yen and held an upper hand against other major currencies on Monday after remarkable growth in U.S. employment added to optimism over recovery in the world’s largest economy.

U.S. employers added more-than-expected 236,000 workers to their payrolls in February while the jobless rate fell to a four-year low of 7.7 percent.

The jobs report signaled the economy may have developed enough momentum to withstand the blow from higher taxes and deep government spending cuts, fuelling speculation that the U.S. Federal Reserve will tone down its ultra-loose monetary policy sooner than anticipated.

“If we see another job growth of more than 200,000 in the next payroll survey, the market will surely get more excited with talk of an exit from QE,” said a trader at a U.S. bank.

The dollar edged up 0.15 percent in Asia to 96.12 yen, not far from Friday’s high of 96.60 yen, which was its highest level since August 12, 2009.

The Fed is currently buying $85 billion a month in bonds to push down long-term borrowing costs and spur economic growth. It has said it will keep buying assets until the outlook for the jobs market has improved substantially.

While investors think the Fed’s next policy step is to scale back its stimulus, they expect the world’s other major central banks to ease policy further.

The Bank of Japan is perceived to be seeking a “new dimension” of easing under new governor Haruhiko Kuroda, who is expected to be appointed this month.

Many market players expect the BOJ to take fresh easing steps at Kuroda’s first policy meeting on April 3-4.

Osamu Takashima, chief FX strategist at Citibank, said the dollar could rise to around 98.60 yen, a 100 percent extension of its sharp decline on February 25, towards early April on the back of the dollar’s broad strength.

But he warned that the yen could rebound thereafter.

“Despite the yen’s fall, the options market has seen a limited rise in dollar/yen implied volatilities and risk reversal spreads, suggesting the latest yen-selling is mostly focusing on the BOJ meeting early April,” he said.

US DOLLAR STANDS OUT

The dollar’s index against a basket of six major currencies stood at 82.722 .DXY, flat on the day and near a seven-month high of 82.924 hit on Friday.

Having risen 4.8 percent since a low hit in early February, the index is seen as on course to test its July 2012 peak of 84.10.

Data from U.S. financial watchdog also showed speculators boosted their bets in favor of the U.S. dollar in the latest week to the highest in more than seven months.

As the dollar firms broadly, the euro was a tad weaker at $1.2995, about 0.1 percent below late U.S. levels after having hit a three-month low of $1.2955 on Friday.

The British pound was just a hair above 32-months low hit on Friday, fetching $1.4918, versus Friday’s low of $1.4886.

The Bank of England is widely expected to relaunch asset purchases as soon as next month to shore up the fragile UK economy.

The European Central Bank may be a bit more cautious about further easing, but reinforcing speculation of more easing, International Monetary Fund head Christine Lagarde said on Friday the ECB should lower rates and allow higher inflation.

The Australian dollar slipped following data published on Saturday showed uneven an recovery in China. Both industrial output and retail sales fell short of market expectations, leaving fixed asset investment as the key driver of economic growth.

The Aussie shed 0.1 percent to fetch $1.0223, edging towards an eight-month low of $1.0116 hit a week ago.

“After the lunar new year holidays, the Chinese economy may not be doing as strong as some had hoped. It seems like the U.S. economy is the only one that has momentum,” said a trader at a Japanese bank.

The information set out herein has been obtained from various public sources and is by way of information only. Broadgate Financial can accept no liability of any sort in relation thereto and readers should obtain their own verification of any statement before making any decision which may have any financial or other impact.

Neither the information nor the opinions herein constitute, or are they to be construed as, an offer or a solicitation of an offer to buy or sell investments.

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