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Portfolio Update

Portfolio Clean-Up

By Elliott H. Gue, on Jan. 10, 2018

We see no evidence that the US is headed for recession, now or in the foreseeable future. To the contrary, the US economy, along with the EU, Japan and China, appears to be accelerating as part of a synchronized up-cycle.

The Conference Board’s index of Leading Economic Indicators (LEI) remains one of our favorite warning signals for the US economy and stock market. When the year-over-year change in the LEI slips below zero, the risk of a recession is elevated. This simple indicator has flashed red prior to all seven of the major downturns that have occurred since the 1960s.

Today, the LEI is up 5.5 percent year over year and has strengthened since mid-2016.

Trends in month-over-month changes in LEI can yield even more timely sell signals. Three negative sequential changes in LEI over a six-month period indicate that the US economy has entered a soft patch or a recession. This indicator warned of a rising risk of recession in the first half of 2016, but hasn’t posted a month-over-month decline since August 2016.

And there’s more.

Most market corrections of at least 10 percent involve narrowing market leadership. Whereas a relatively small number of large-capitalization stocks led the market higher in June and October 2017, this time the cumulative advance-decline line for equities traded on the New York Stock Exchange has reached new highs along with the S&P 500. Bottom Line: This rally has broad-based support.

With the bull market poised to enter its 10th year, this rally has likely entered its final stages. The recent upsurge in commodity prices and early signs of a pick-up in inflationary pressure could indicate that the bull market has entered its latter stages.

However, until market leadership narrows or our favorite forward-looking economic indicators exhibit signs of deterioration, we’re inclined to regard dips as opportunities on the long side.

Time to Sell

We’ve decided to lock in our profit on iShares MSCI Europe Financials (NSDQ: EUFN), which trades slightly above our buy target.

Although we remain bullish on US financial stocks at this stage in the cycle, concerns about potential weakness in Italian and Spanish equities mean that we prefer exposure to individual names in Europe.

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