Tuesday, May 13, 2008

Simply More Evidence As To Why A Light Allocation To Equities Is The Prudent Thing To Do

Below is a chart of the 10 Year Note yield with the S&P 500 cash index placed over it.

Equity prices are represented by the dotted blue line and yields are the candlestick chart.

What I want you to get out of this visual is the clear linking of interest rates to stock prices at the current time.

It is abundantly clear that as go interest rates so go stock prices and the yield on the 10 year note from a technical standpoint is looking to work lower and in all likelihood will bring stock prices along with it. The question remains as to whether or not this will be a corrective mode from the low at 1260, which would keep 1260 in tact or if this decline may be the start of a new leg lower.

I am taking no chances either way, as I currently recommend a very bearish 45% allocation to equities and a finger on the trigger to hedge 100% of stock portfolios with options should we get a confirmation that we are in fact in a new leg lower. Either way we are very well protected from a move lower in stock prices. There are simply to many investors out there who firmly believe that the worst is over and have begun if not already moved their allocations to 85% stocks in hopes that the bear market is over and we are in the first leg higher of a new bull market. It is precisely this type of psychology that makes me reluctant to believe that the ultimate lows in the equity indexes have been seen. It would be a different story if these sentiment readings did not get so bullish so quickly, but they have and we MUST adhere to what history has taught us over and over again. THE MASSES ARE WRONG AT MAJOR TURNING POINTS IN STOCK PRICES!

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