Saturday, April 8, 2017

April Market Update - Lower Expectations or Accelerating Earnings?

March 2017 was relatively uneventful for the S&P 500 (-0.04%). For the first quarter of 2017, the S&P 500 gained 5.53% --the best first quarter for the index since 2013. Overall, it was the best quarter for the market since the fourth quarter of 2015. On March 21, the S&P 500 dropped 1.2% (after the healthcare legislation failed to pass), only the second move of greater than 1% or more in either direction this quarter, the fewest such moves since 1995. Let's jump right into price, sentiment, and valuation for the market.


Price
First, looking at moving averages three of the five asset classes we follow showed to stay invested. The invested asset classes were US stocks (VTI), foreign stocks (VEU), and commodities (DBC). The uninvested asset classes at month end were real estate (VNQ) and bonds (IEF). As we've discussed we don't want to rely solely on moving averages for our tactical allocation changes. Looking at these charts it seems like bonds have found a period of support and US stocks look like they've plateaued. For a more technical analysis of the S&P 500 please read Chris Kimble's blog post titled: S&P 500; Three bearish wicks in past 6-weeks?. He shows that we've hit resistance on the market. He further points out issues with the Dow Transports index similar to the patterns in 2007-2008 and 1999-2000 with this blog post. In his chart, Chris sees support at 9,109. “A break below this line would be the first warning to investors,” he said. The index closed at 9,104.81 on Friday, April 7th. If earning results for the first quarter fail to push this market higher, then the market looks set up for that overdue 5%+ stock market correction.

Sentiment
The CNN Money Fear & Greed Index shifted from 78 -at the end of February- to 30. It currently reads 40 and is in the fear camp. This reading is most helpful for investors if it is below 20, indicating the market is extremely fearful and may present a time when investors want to increase money into the market. When we look at technical trading patterns the short term (2 to 6 weeks) looks strong, intermediate term (6 weeks to 9 months) patterns look negative, and long term patterns (9 months to 2 years) look neutral. Sentiment data overall does not discourage or encourage me about this stock market.

Valuation


Notice that you will need to double click on the video above to view it in full screen mode. Charles Carnevale, creator of Fast Graphs, shares his perspective on the overvalued market we are currently experiencing. As I've written in many of my monthly updates this does not have a large impact on short term moves in the stock market, but it does impact long term investor returns. Charles shows clearly that a 5-7.5% correction is very reasonable and caution in terms of the general market is warranted. For a more sobering analysis of valuations please read this article (Famed Investor Predicts Historic Market Drop) written by Jeff Bukhari at Fortune. Jeff summarizes John Hussman's take on the market as:
But Hussman's main point is that back in 2000 and 2007 there were a relatively small group of super-expensive stocks, including technology, and later finance and housing companies, respectively, that drove the average valuation of the stock market much higher than normal. Today, it's the median, not the mean, S&P 500 valuation that sits well above the peaks seen in 2000 and 2007, indicating that there are far more companies these days that's shares trade at much higher-than-normal valuations. That's why Hussman says the risks of investing in the stock market right now are much more widespread and scary than they were in the past.
Summary
The market has plateaued since its strong February performance. The economy continues to accelerate, however the market has priced in higher earnings. If those earnings materialize the bulls will prove vindicated for investing at these levels. If those earnings fall short of expectations, coupled with a Trump administration that seems unable to pass meaningful legislation, we are ready for the market to pullback. Let me leave you with this excerpt from Paul Merriman's book, Live It Up Without Outliving Your Money!: Getting the Most From Your Investments in Retirement:
"Smart people make plans for their retirement, financial and otherwise, and they put those plans in writing."
"Smart people don't wait for retirement to start making their dreams come true. Smart people accept the fact that life is uncertain and all the tomorrows we assume will be there can be snatched away in an instant. With wealth set aside for their futures and with their goals and dreams clearly identified, the really smart folks I know are always looking for ways to turn those dreams into reality, starting now."
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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