The market acts like it is topping even though the major averages are hitting new highs. Last week both the Russell 2000 and the Value Line Composite were down, continuing their under-performance. Valuation got worse as well, signaling that earnings expectations are drifting lower in the very short term faster than the broad market is declining. Overall, though, earnings estimates are still trending higher and unemployment is low and stable. There is no change in sentiment - still modestly negative for stock prices. My simulated model gained a couple of new names last week so my cash position is now 20%. Further increases in stock prices would further limit my stock holdings and a poor unemployment report next week could put me into a hedged position.
The market seemed strong last week as the major averages continued to hit new highs. However there were only about 100 more stocks up than down over the five day period. Valuation got a bit worse although my model found a couple additional stocks to buy so my cash position is now 30%. Earnings estimates are still in an upward trend and the unemployment rate is low and stable. Sentiment is an ongoing problem but not too serious just yet. A correction would not be surprising and might actually be welcome but the real economic future is going to be determined by government action on health care and taxes. Hopefully, there will be positive moves taken. The market is expecting the best.
This two year chart of my simulated model shows a continuing level of churning for most stocks while the major averages are performing much better. That is cause for concern along with the high valuation of stocks in general and the bullish sentiment of small investors and speculators. On the positive side, earnings expectations are still slowly increasing and unemployment remains positive. My model is only picking eleven out of twenty possible stocks this week so I still maintain a healthy cash position.
Richard Moore, CFA
With my wife in Hawaii