Stocks have rallied dramatically from the December lows, with the S&P 500 gaining over 12% and the NASDAQ up an incredible 15.5%, hitting a new 11-year high – the highest level we have seen for this index since the peak of the tech bubble in early 2000. Stocks are extremely overbought on a technical basis, and appear ripe for a short-term pull-back of at least 5% to 10%.
In the chart of the S&P 500 above, we see a significant amount of congestion around the 1,350 level. The high over the past year or so is 1,364. While we are experiencing a strong uptrend from those December lows, I believe stocks will have a difficult time penetrating the resistance at the 1,350 level, and will most likely experience that pull-back very soon. Should we advance through 1,350, we could certainly trade up into a new, higher trading range. In fact, eventually I believe that is exactly what will happen. I have a 1,500 target for the S&P 500, sometimes during 2012. However, I do not think we will get through this level before we see a pull-back. As a result, I have trimmed positions and now hold approximately 40% in cash for stock allocations. I am still 60% invested in stocks, because, of course, I could be wrong! I also sold calls against existing positions with March expirations to raise additional cash.
I will look to put cash to work should we get a short-term pull-back, focusing on those sectors that will benefit most from the U.S. economic improvement I believe will come over the next few years. This would include Technology, Industrials, Financials, and Consumer Discretionary stocks. I will look at energy in the future, but with oil near $100 per barrel, I am not a buyer.