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Von Aldo

Dow Theory Signals Caution; But Optimism Grows on Equities

Alrighty, equities are back, touching numbers not seen since, their 2008 highs. Small caps (Russell 2000 up by, as the WSJ aptly put it, an "eye--popping" 36% since October) are on a run and no one cares. Midcaps are tearing it up, followed by the S&P and the Dow. Yet the Dow Transports have posted a lackluster recent performance, in short, showing signs of weakness recently (but still up big over a three-year return). DowTheorists, who hold that Transports (truckers, railroads and etc.) must also rise in tandem, are skeptical over the lack of correlation. Question: How are your clients feeling?

Probably not good, according to advisors I speak to. As is typical, retail investors have been dumping small-cap funds, according to the ICI, as the exact wrong time. While I am hip to the idea that U.S. equity valuations are at historical lows, one wonders if Gary Shilling, head of a respected economic forecasting consultancy, warns in his new book (okay, not new, released back in 2010) that the global economy is going through a long period of deleveraging and weak growth, according to the press release for the book, "The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation," (Wiley books).

I've just cracked the book, and although I am bullish, warnings are, well, worrisome. He says the U.S. economy will be held back because consumers are retrenching, deleveraging, and that housing will be weak.

Don't expect much from commodities, then. Protectionism, weak government spending (a good thing in my opinion; let us, individual actors in the economy, direct our money into investments we're interested in), will lead to slow growth and deflation. I agree with him that too many Americans are becoming wards of the state.

Another point supporting his bearish sentiments: Investors are growing optimistic. Hmmm. What do you think? What strategies are best in this environment of "cheap stocks" but cloudy economic portents?

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