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Weekly eLetter 9/13/2019 –A Fitting Palindrome Week

We are about to reach the last palindrome date of the current century; perhaps it is a suitable time for markets to reverse currently established trends with great ferocity. Generally speaking, what was a dragging asset in August (and perhaps the last quarter) has become a leading asset in September, and vice-versa. Why? While there have been some headlines referencing the US/China situation, Brexit, and Hong Kong, none of these big headline issues have been solved.

But perhaps these items have lost headline influence, and are also losing their fear factors that have existed over the past few months. During this time there may have been an over-investment in ‘safety’ assets, as dollars flowed to fixed income, and sector investors moved from the aggressive sectors to the more defensive conservative ones.

As we mentioned last week, we would not be surprised (and are not surprised) to see markets reversing rather violently. And with an expected easing further by the Fed this month (despite the fact that most economic data is quite good), it certainly appears that we may see markets finally breach their all-time highs once again. (The major indexes* are currently within one percent of their all-time highs!).

So, the big question now is whether this sudden reversal of emphasis in markets is enough to reverse the damage that has been done by the geopolitical issues that have hindered investor confidence in recent months. It is my belief that the extremes that were reached in August (especially toward the end of the month) may actually be reaching a turning point that can give us a definitive change in trends in the next few weeks.

Specifically, we could easily accept that it is time for the defensive sectors to give way to the aggressive sectors – and Real Estate, Utilities and Healthcare lose ground to Industrials, Technology and Consumer Discretionary stocks. Along with that possible change it appears that my dissing small-caps for the past six months may be coming to an end as they are (finally) showing some strength. And just maybe they will outperform their larger brothers for the balance of the year.  Who knows? We may even see dollars flowing back into emerging markets at the expense of developed – nation stocks.

Just as assets flowed into defensive sectors rather than cash, it is my expectation that assets will likely flow back into aggressive areas, rather than out of markets.

As Tony says – ‘A week does not make a trend’. And for that matter, two weeks does not yet make a trend either. So, now we watch closely and as the technical indicators and prices change, we look to dial the thermostat away from the areas that are losing strength, and toward those that are gaining. As I mentioned earlier in the year, we may indeed see 28,000 on the DOW before the year is finished.

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