The last major correction we saw in the major indices was around the April-May time frame. Starting around June-July, the market has charged higher letting nothing stand in its way.
- A decline in the housing market? No problem!
- European debt crisis? Old news!
- Sub-par earnings or revenue numbers? Heard that every quarter!
- An uninspiring holiday season? That is so last year!
Multiple expansion was the only focus of the market. Indeed, over the past few months, the P/E ratio of the S&P rose to 23.5 from 20 – a 17.5% expansion. The S&P on the other hand rose from about 1075 to 1290, a 20% move. This means that the earnings increase has been a MUCH smaller part of the market move than investor expectation and in some part – investor euphoria. Lets take a look at the investor euphoria that has welcomed 2011.
The consensus bullish sentiment as measured by Consensus Inc measured 72% to welcome 2011. The AAII sentiment had almost 56% of its responders feeling bullish with a mere 18% feeling bearish. Are we sensing something here? The bullish percent on the S&P 500 was 86% and a full 90% of the shares on the S&P 500 were trading above there 50 day moving average and an even greater percentage, 91%, trading above their 200 day moving average. It sure looks to me that the eggnog that the investors were drinking over the holiday season might have been spiked!
Now for a dose of reality -
- The recent earnings numbers coming out have been less than inspiring. For the first time in the last 6 quarters, the stocks have stopped moving higher through the earnings season. While the earnings season has not yet come to an end, this is something to be concerned about.
- China has a serious inflation problem – and so does India and Brazil and most other countries we look to as ‘savior’s of the American way of life’. As these countries start tightening their monetary policy, the results for countries relying on China to buy their exports such as Canada and Australia, or on those countries exporting inflation such as American and the EU will feel the pinch. Exports from Canada and Australia will likely slow while the U.S. and the E.U. will likely have to stop supporting the concept of a welfare state as the bond yields start spiking higher.
Now to be fair, I am not suggesting you pull your money out and stuff it into your mattress. What I am suggesting is that, there is room for a pause, and perhaps a correction lower – in the range of 1200 on the S&P and 12,000 on the TSX. This will help shake us investors out of the eggnog induced coma and help us start focusing on the reality so that we can all start looking at the markets in a more constructive manner. The 3rd year of the presidential cycle has produced positive returns for the markets since 1939, and there is a high probability we will be higher by the year’s end.
- See what others see, think what others don’t.
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A Correction is Long Overdue
The last major correction we saw in the major indices was around the April-May time frame. Starting around June-July, the market has charged higher letting nothing stand in its way.
Multiple expansion was the only focus of the market. Indeed, over the past few months, the P/E ratio of the S&P rose to 23.5 from 20 – a 17.5% expansion. The S&P on the other hand rose from about 1075 to 1290, a 20% move. This means that the earnings increase has been a MUCH smaller part of the market move than investor expectation and in some part – investor euphoria. Lets take a look at the investor euphoria that has welcomed 2011.
The consensus bullish sentiment as measured by Consensus Inc measured 72% to welcome 2011. The AAII sentiment had almost 56% of its responders feeling bullish with a mere 18% feeling bearish. Are we sensing something here? The bullish percent on the S&P 500 was 86% and a full 90% of the shares on the S&P 500 were trading above there 50 day moving average and an even greater percentage, 91%, trading above their 200 day moving average. It sure looks to me that the eggnog that the investors were drinking over the holiday season might have been spiked!
Now for a dose of reality -
Now to be fair, I am not suggesting you pull your money out and stuff it into your mattress. What I am suggesting is that, there is room for a pause, and perhaps a correction lower – in the range of 1200 on the S&P and 12,000 on the TSX. This will help shake us investors out of the eggnog induced coma and help us start focusing on the reality so that we can all start looking at the markets in a more constructive manner. The 3rd year of the presidential cycle has produced positive returns for the markets since 1939, and there is a high probability we will be higher by the year’s end.
- See what others see, think what others don’t.
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