Thursday, November 3, 2016

Pre-Election Market Update

What a week for the market? Down, down, down we go as the rally has started to stumble and everyone is concerned about the United States presidential election on November 8th. Let's look at the data to see where we are in terms of price, sentiment and valuation.
Price
Price action remains positive for owning stocks, however price action has deteriorated. The monthly moving averages for the S&P 500 are barely holding up and both the bond(IEF) and real estate(VNQ) markets have turned to monthly sell signals. Meb Faber's Timing Model shows all main asset classes near or below their 10-month simple moving averages. As I noted in January, we could be topping from the rally that started in 2009. Chris Kimble at Kimble Charting Solutions further demonstrates this peaking scenario with his recent post, Broad index at 2000 & 2007 levels, another top? Here is the graph he posted showing the Value-Line Geometric Composite Index:
Chris notes that this index remains inside of a 6-year rising bullish channel, despite the weakness over the past 18-months. If the index would break below this 6-year rising channel, suspect selling pressure would take place.
Sentiment
This gauge has dropped from 44 at the end of September 2016 to below 19. When sentiment drops this low it often makes sense to go against the crowd and invest. We'll know more at the end of November.
Valuation
Market remains overvalued, near the peak it reached in February 2015. Let's illustrate this with a chart from Advisor Perspective's Jill Mislinski writing for the Doug Short blog.
Jill writes: "As we've frequently pointed out, these indicators aren't useful as short-term signals of market direction. Periods of over- and under-valuation can last for many years. But they can play a role in framing longer-term expectations of investment returns. At present market overvaluation continues to suggest a cautious long-term outlook and guarded expectations. However, at today's low annualized inflation rate and the extremely poor return on fixed income investments (Treasuries, CDs, etc.) the appeal of equities, despite overvaluation risk, is not surprising."
In summary, price action barely remains positive for equities (negative for REITs), sentiment is too pessimistic and the market remains overvalued. Traders will probably add money back to the market after the election. They probably raised too much cash. The next U.S. president must face one of two scenarios during the first term: Either the president will have to deal with a recession in office, or the U.S. will have the longest economic expansion in its history. Barry Rithotz wrote a fantastic piece for BloombergView titled, Shift From Active to Passive Investing Isn’t What It Seems. It is a must read if you want to further understand the current popularity of passive investing. As John C. Bogle says, "The miracle of compounding returns is overwhelmed by the tyranny of compounding costs." Wise investing my friends.
Please consult a qualified financial advisor before making any investment decisions. This blog is for educational purposes only and does NOT constitute individual investment advice.

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