Value Line, the well known stock picking digest, has turned more bearish on U.S. equities than at any point in the last 10 years.  The company is telling subscribers to pare back equity exposure to just 60%-70%.  That’s a low figure for most Wall Street research firms.  MarketWatch reports:

“according to one top-performing newsletter, there’s been too much of a good thing in the stock market since this rally began last March.The newsletter is the Value Line Investment Survey, which is in a tie for first place for risk-adjusted performance over the three decades the Hulbert Financial Digest has been monitoring the investment newsletter industry.

In its Aug. 21 issue, which was emailed to subscribers early Monday, Value Line reduced its recommended equity allocation to the range of 60% to 70%.

This reflects a cautious to outright bearish posture on Value Line’s part, since the firm has never lowered its recommended allocation to below 50%. The last time it was lower than it is now was October 2000.?

Value Line’s rationale for lowering its recommended equity allocation was not that the economic and financial news is about to take a big turn for the worse, however. Instead, the firm’s concern is that the stock market has rallied so far, so fast, that it has gotten too far ahead of itself.

“The equity market’s relatively high level assumes a lot of things going right within the economy,” Value Line wrote in its issue received Monday morning. “If some of these things go wrong, the reaction could be swift and severe.”

That was written before Monday’s stock market rout, of course. But the market’s sell-off would appear to be a good illustration of the phenomenon: The major reason given for the sell-off was not bad economic news but the mere fact that overseas stocks markets fell.


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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • Nick

    When the stock market doesn’t need much reason to rally a lot. Then it won’t need much reason to plunge a lot either.

    All it would take is worse than expected company earning either at the end of this quarter or the next. Analysts have been raising their earnings expectations. And the stock market has already priced in a huge recovery in earnings of companies.

    It looks like consumers aren’t buying much during the current back-to-school sales.

    And if consumers stay home for Christmas too. Then the stock market will probably turn out to be a stingy Grinch rather than a generous Santa Claus.

  • E

    the general consensus/feel from EVERYONE i talk to is that things are bad, the economy, confidence, the future….

    BUT, for those who are employed, are looking up, business is improving (as measured on the “how busy factor”), sales arent falling (but at 20-30% below last years, and profits are rising (dead weight wacked, no raises, no bonuses, etc)

    so, it comes down to the haves and have nots

    those with jobs, those in the upper 5%, are more or less spending as usual, but the fattening middle class is taking the gas pipe

    how long can this continue?