It's a slow process. When Grecian Formula is used as a hair coloring agent, it slowly turns those grey hairs darker until the user has no more grey. Similarly with Greek finances, after many years of borrowing and spending the bill is finally coming due. There may be a further postponement but I can't believe anyone really thinks there will not be more pain ahead for the Greek people. The US is on the same path, of course, and it is only a matter of time until we face a similar fate.
There are no Greek indicators in my model but when valuation is as high as it is, disappointing external events are more worrisome than they would otherwise be. In addition, sentiment factors still show most small investors and speculators are bullish. While earnings expectations are still trending higher, my model just sees too much risk in the current environment. I am still fully hedged.
The market is expecting a significant turn-around in earnings beginning in the second half of this year. If that scenario actually plays out, then it is probable that stock prices will not change much because valuations are so high at the current time. On the other hand, should earnings estimates be reduced, I would expect a substantial decline in stock prices. So, while sentiment factors are improving somewhat, they are still negative and my model continues to call for zero net exposure to stocks. I am using two aggressive stock screens to come up with stock ideas that I use even in the current hedged position. Those screens currently highlight the following stocks: ZAGG, BSET, SGC, CMT, KIRK, PATK, AEPI, RCKY, BELFB, FLXS, GNCMA, LCI, CVG, IIVI, IOSP and RUTH. I own many of these names.
It still looks like distribution to me with volatility, not much change in prices and more stocks down than up. Earnings expectations are staying flat, waiting for more clarity on Q2 results. The trend is still up, however. Valuation remains at one of the worst levels for the median stock in 15 years. Sentiment is mixed. I see some indicators that are showing some worry developing among small investors but the indicators I rely on the most are still showing complacency and even a tendency to buy the dips. Overall, it still seems like a very risky environment and my model recommends zero net exposure to stocks.
Earnings expectations have flattened out for the next 52 weeks but they are still positive. However, valuation remains a serious problem, especially given the increase in interest rates. Finally, the sentiment picture has deteriorated and is now negative because small investors and speculators are buying into the flat-to-down environment of the past couple of weeks. I am back to a fully hedged position again.
Richard Moore, CFA
With my wife in Hawaii