Polar Bear Dip

Tomorrow, many polar bear dips will mark the new year. Plunging into equities now is similar to jumping into cold water, especially after a year of huge gains and an uncertain political backdrop. The effect can be shrivelling to your wealth as well as other things!

Last week, the stock market splashed some cold water on investors' faces. The now positively correlated stock and bond markets have pulled back to 3 to 7 %, depending on the factor at work. Interest-sensitive sectors like Homebuilders and Small-cap have underperformed. At the same time, the herding effect of year-end window dressing has kept the most favoured growth names virtually immune to corrective efforts. What now?

Buy the dip!

The uncertainty over inflation that backed up the bond markets is overdone. The incoming U.S. administration's policies will unlikely affect the economy in the short term. If anything, the uncertainty over what comes out of Trump's mouth is enough to curb exuberant economic activity from generating an inflationary surge of investment demand. At the same time, his obsessive attack on immigration will distract his attention from any pro-growth planning. Congress is already baulking at his most extreme pronouncements.

This means the bond markets have over-shot as they did earlier this year and should rally into the seasonally strong early January period. Reflexively, the most oversold segments of the market will bounce back quickly from this month's tax-loss selling pressure. A quick rotation back to value from over-bought Growth is shaping up nicely.

TLT - Bond ETF

The bull market won't end until the Fed kills it. That day will come, but not at any time soon. Sentiment has pulled back sufficiently as the suddenness of the pullback has caught everyone off guard.

AAII Sentiment

So it's time to get wet, whether you jump in with both feet or slowly acclimate to the water!

Risk Model 3/5 - Risk On

The RSI has recovered from the depressing effects of last week's sell-off, and the VXV remains below the danger zone. Only the Copper/Gold and AAII sentiment indicators are negative—typical mini-correction. The market is no longer overbought, and the RSP equal-weighted ETF has stopped underperforming the broader averages. Good entry point!

Equal Weighted vs SPY