I’ve been pretty nervous these last few months. Fortunately it’s not because I’m losing money — I exited the markets completely about two years ago. No, I’m guilty of avarice. This little piggie wants to make sure he goes to the next bull market.

They say that every trader’s investment style is colored by his or her “first” market. I started in the industry some twenty years ago just as the stock market was peaking. I lost my entire first year’s bonus when the market crashed; I had invested only in three-month options – oops. That experience, coupled with being sired by a risk-loving father who’s gone bankrupt twice, has permanently imprinted me with the risk tolerance of an 88-year-old widow.

Sometimes my bearish disposition is a good thing: I was an analyst living in Asia during the 1997-98 financial crisis. Sometimes it’s a bad thing: I was bearish about internet stocks about a year-and-a half too early.

I tell you all this because I honestly don’t know what to do right now. My gut feeling — which you should consider irrelevant — is that this bear market is not yet over. I base this on three factors:

  1. A broken US consumer
  2. A China which I believe will disappoint
  3. Valuations which are not compelling

I won’t bother to elaborate for the reasons discussed here.

But there is another factor which does bear discussion. AAA-rated debt aside, the fixed income guys aren’t buying. The last few weeks have seen powerful rallies in US equities. This could be a bear-market rally — bear markets are notorious for vicious short-term swings to the upside. Or it could be something more. But if this bear market is over, you’d think junk debt would be rallying at least a little. But as you can see from the chart, HYG has barely budged. The average yield to maturity on this high yield corporate bond fund is currently around 18% per year on a 4 1/2 year duration. Since bond holders rank first in an insolvency, bond investors must be expecting some pretty steep losses at these companies. So why are equity shares rallying? Can the equity guys and the debt guys both be right?

hyg1

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All that said, with the Canadian political “crisis” causing the TSX to underperform global markets, this little piggie decided to dip his toes back in the water these last few weeks — mainly through XIU and a little HYG. This puts me at just under 4% market exposure, which may not seem like very much — unless you’re an old lady like me.