Market Update - 2nd December 2013

Stock markets continued to move higher last week though volumes were light due to the Thanksgiving holiday in the US. My technical trend indicator remains in bullish mode, a solid 47 points above the long-term moving average, thus continuing to confirm the bullish trend, though the rally is very stretched in the short-term. The US Federal Reserve is providing additional fuel for the rally by printing money at a mind-boggling pace. The adjusted monetary base in the US is now approaching $4 trillion, +360% in five short years. With valuations (S&P 500 trades at 19.7x 2013 earnings) and confidence running high, risks of a downside break in markets loom large.

Economic: Consumer confidence data was mixed with the Consumer Confidence Index posting a decline for November but the University of Michigan Consumer Sentiment Index rising.

Technical: From a technical standpoint, the trend is still positive, though the Advance/Decline Line has stalled, unable to keep pace with the recent stock market rally. There remains little urge to sell as momentum investors continue to chase performance through year-end.

Strategy: The stock market remains overvalued, overbought in the near-term and investor sentiment has reached an optimistic extreme. We therefore maintain our cautious stance with an allocation in the model portfolio of 20% stocks, 50% bonds, 20% gold and 10% cash.

Next update: Friday 6th December 2013.