It may not be the best six months we've seen in this post-recession period, but the 18 percent rally in the S&P 500 (^GSPC) since November is certainly the longest streak of monthly gains. With stocks pushing deeper into record territory, John Canally, economic strategist at LPL Financial, says investors need to heed the conflicting signals.
"It's very strange. You have markets telling different stories," he says in the attached video. "I think I trust the commodities markets a little bit more than the U.S. stock market as an indicator."
While stocks have been able to overcome every obstacle for the past 6 months, Canally says they're sending an "everything is great" message to investors, while bonds and especially commodities are reflecting the risk of deflation or economic contraction.
That doesn't mean he's bailing on stocks, it simply means he's positioning for a modest pullback. "If and when we do get a pullback, it's not going to be a 10-20% pullback like we had in these past three years," he says, noting the improved fundamentals, especially in the housing sector.
But with Europe facing a prolonged recession and no sign that China is going to re-accelerate anytime soon, Canally is ''focused on the defensives" including Utilities (XLU), Health Care (XLV), and Consumer Staples (XLP)."
"Counter cyclical rallies don't last too long and we have seen it a few times in past couple months," he says, adding the he expects it to ''flip itself around'' again.