Martin Roberge, portfolio strategist at Dundee Capital Markets, has cut his equity exposure to 55 per cent from 60 per cent, putting the proceeds into cash. That might sound like a modest trim, and it is, but the reasons behind it are very interesting.
"Investors should not read into our equity downgrade an abrupt shift toward a bearish earnings/equity outlook," he said in a note.
However, he then outlined what could be a wild ride for stocks in September and October - and how he plans to take advantage of it.
The way Mr. Roberge sees things, the 50 per cent rise in stocks since early March does not represent the start of a new bull market because valuations have become stretched. He noted that both the S&P 500 and the S&P/TSX composite index are trading at about 15-times estimated earnings, which is on the historical high side.
As well, he believes that the consumer and financial deleveraging process is not yet complete, while the U.S. economy will be struggling with surging debt relative to gross domestic product.
"A prolonged restrictive fiscal policy is unavoidable and must be factored in when it comes to setting market multiples," he said.
However, he believes that bouts of market weakness in September and October will make him more enthusiastic about stocks, and should set the conditions for him to overweight stocks again.
"In other words, we allow for the stock market to take a breather and then possibly resume its advance later this year and reach new highs in the first half of 2010," Mr. Roberge said.
Just as important, he thinks that stocks are becoming more attractive relative to corporate bonds due to tumbling bond yields - establishing the conditions for an asset allocation trade later this year or early next year.