Date: May 12, 2014

All Time Highs on Tap

Despite significant warnings from the S&P 400 mid caps, Russell 2000 small caps, Nasdaq 100 and a host of sectors, the Dow Jones Industrials and S&P 500 are poised to see all time highs this week. The headlines will look nice and investors may cheer, but serious damage remains beneath the surface over the intermediate-term.

Yes, we remain long various indices and sectors, but we will likely lighten up or hedge on a quick spurt higher. If we do see a run to new highs, it will be very telling to see how the lagging indices perform versus the leaders.

Additionally, as I have written about many times before, I think I have been just about the only long dated treasury bond bull around. It has been a fantastic run. I am keenly interested in how treasuries behave should stocks breakout to the upside. For much of 2014, bond bulls have stepped up into every pullback and that indicates something negative brewing on the horizon for the economy or stock market.

Longer-term, the bull market is intact and certainly has the look and feel of being in the final stage which can last months, quarters or even a few years. Evidence for this conclusion can be seen in the divergence in the major indices as well as the fierce sector rotation into REITs, consumer staples and utilities.

The best scenario for the bulls would have stocks shoot higher and form a top over the next month. From there, a pullback or correction lasting into the summer would restore some pessimism and repair some of the internal damage. That could set the stage for a better leg higher later in the year above Dow 17,500 or even 18,000.

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Paul Schatz, President, Heritage Capital